The Strategic Importance of the Strait of Hormuz and Global Energy Security

The principle governing the world oil market is, simply put, supply and demand. When there is a balance between supply and demand in the oil market, prices remain stable. Based on assessments by geopolitical theorists, an open conflict in the Strait of Hormuz, and even the threat of a possible conflict, can have dangerous consequences for energy security, and, consequently, energy producers and consumers themselves.

THE WORLD’S MOST IMPORTANT OIL SUPPLY CHOKEPOINT

According to the US Energy Information Administration, in 2018, 21 million barrels of oil and oil derivatives (equivalent to 21 percent of global oil and oil derivatives) were shipped daily from the Strait of Hormuz. The United States imported 1.4 million barrels of oil and oil derivatives per day from the region, transported through the Strait of Hormuz. According to the US Energy Information Administration, in 2018, more than 76 percent of the oil and oil derivatives from the Strait of Hormuz were shipped to Asian countries. Most of the oil used by China, India, South Korea, Japan and Singapore passes through the Strait.Посмотреть изображение в Твиттере

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Javier Blas@JavierBlas

CHART OF THE DAY: Timely briefing note about the Strait of Hormuz from the @EIAgov, including updated 2018 #oil flow data | #OOTT #Iran Link here: https://www.eia.gov/todayinenergy/detail.php?id=39932 …212:12 – 20 июн. 2019 г.Смотреть другие твиты Javier BlasИнформация о рекламе в Твиттере и конфиденциальность

The Strait of Hormuz is one of the most important international waterways in the world, and facilitates the export of about one-fifth of the world’s crude oil. Due to reduced Iranian oil exports and instability in the region, the price of crude oil has increased dramatically in recent weeks, and the closure of the Strait of Hormuz will likely continue to spark turbulence in the global energy market.

CHINA

The control of resources and energy pathways (which play a role role in energy security and economic growth of major energy consuming countries) has always been a priority of world powers and factored in heavily to global political equations. The United States sees an opportunity to control oil trafficking in important export zones such as the Strait of Hormuz to reduce the economic growth of China and other countries.

For China, oil security is the most important issue in regard to energy security, while for other countries it is often gas or other fuels. According to the latest statistics, China is the biggest beneficiaries of the Strait of Hormuz; they receive about 4 million barrels of oil per day from Saudi Arabia, Iran, Kuwait, Iraq and the United Arab Emirates. Around 42% of China’s imported oil passes through the Strait of Hormuz.

Lowering the importance of the Gulf region’s oil for the United States may reduce the security of their interests in the region. The use of regional markets, the prevelent issue of international terrorism and the prevention of non-peaceful nuclear expansion, along with controlling the flow of oil and energy, are among the major factors compelling US interest in the region. This assures that competition and security questions for China in the Strait will only continue to rise.

THREATS TO CLOSE OF THE STRAIT OF HORMUZ

Iran’s recent threats to shut down the Straight are hardly the first of their kind. Last year, Iranian President Hassan Rouhani said that if the United States continues its efforts to cut Iran’s oil exports, Iran will ensure that no other country can export its oil. Iran’s Supreme Leader Ayatollah Khamenei said that Rouhani’s threats represent the official policy of the government. Unilateral action by Iran to stop shipping ships in the Strait of Hormuz, according to international law, will be considered as the pretext for war for those countries that rely on the Strait and their allies.Посмотреть изображение в Твиттере

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Platts Oil@PlattsOil

UPDATE: US to end Iran sanctions waivers in May; Iran threatens to shut Strait of Hormuz | #crudeoil #OOTT | @BrianJScheid + @meghangordon story: http://plts.co/mEai50rbYkS 1511:07 – 22 апр. 2019 г.23 человек(а) говорят об этомИнформация о рекламе в Твиттере и конфиденциальность

The strategic position of the Strait of Hormuz allows Iran to levredge its control in order to achieve specific economic and political goals. If the Straight were to be closed, the flow of oil would spiral into a deep shock, making it very difficult for countries that ship oil from the area, and very costly on their economies.

THE CARTER DOCTRINE AND THE IMPORTANCE OF THE STRAIT OF HORMUZ

In the early years of the Iran-Iraq war, under the aegis of President Jimmy Carter, “Centcom” was established to maintain security and stability in the Gulf region. The principles of the Carter Doctrine in regard to Persian Gulf security are as follows: “Any attempt by foreign forces to attack the Persian Gulf is an attack on the vital interests of the United States. Such attacks must be repulsed in any way that is necessary, including military action.”

ALTERNATIVE ROUTES TO THE STRAIT OF HORMUZ

Saudi Arabia built pipelines in 2007 that would allow the transit of oil from the Persian Gulf to bypass the Strait of Hormuz. The Saudi Arabia Petroline (East-West pipeline) is 750 miles long, extending from oil fields east of the country to the Red Sea in the west to the port of Yanbu.

Through the petroleum system, the Saudis can go round the Strait of Hormuz or Bab Al-Mandeb and reach tankers in the Red Sea, and from there the Suez Canal and the Mediterranean. The pipeline has not yet been completed. Saudi Arabia also has an inactive pipeline that crosses Iraq, but has ceased Iraqi operations after the Iraqi invasion of Kuwait.

Dan Tsubouchi@Energy_Tidbits · 29 мая 2019 г.

Bolton seems to confirm May 6 Iran report of explosions at Yanbu port, “had been a 4th unsuccessful attack on Saudi Arabia’s Yanbu port a few days before the operation off Fujairah” Remind Houthis long range missile threaten critical Saudi oil infra. https://www.dailymail.co.uk/news/article-7081167/The-Latest-Bolton-says-Iran-stick-nuclear-deal.html …John Bolton says Iran ‘almost certainly’ behind oil tanker attacksThe U.S. National Security Adviser said he was sure Tehran was to blame for the attacks earlier this month. He was speaking to reporters in Abu Dhabi ahead of emergency summits in Saudi Arabia.dailymail.co.uk

Dan Tsubouchi@Energy_Tidbits

Yanbu: EIA data – 2nd most critical Saudi oil infrastructure, only export capacity not thru Strait of Hormuz, oil pipeline 4.8 mmb/d & NGL pipeline 0.29 mmb/d to Yanbu, 635,000 b/d refining capacity, export terminal storage capacity 12.5 mmb and loading capacity 6.6 mmb/d., #OOTT208:52 – 29 мая 2019 г.Информация о рекламе в Твиттере и конфиденциальность

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Смотреть другие твиты Dan Tsubouchi

Earlier this year, the UAE, with the intention of circumventing the Strait of Hormuz, signed a contract with a Korean company (SK Engineering and Construction Company (SKEC) to build the world’s largest oil storage facility. The capacity of this warehouse will be 42 million barrels. This oil storage will be built in the Fujairah area of ​​the eastern part of the country (by the Emirate coast of the Oman Sea and the eastern side of the Strait of Hormuz). The UAE has already built a pipeline that can transport 70 percent of its oil production to the international markets without the Strait of Hormuz.

Meanwhile, in the event of a military conflict in the region, plans to bypass the Strait of Hormuz will not provide security for the transfer of oil from the region to the global market.

QATAR AND LNG EXPORTS

Along with carrying oil from the Strait of Hormuz, more than a quarter of the world’s LNG is also transported through the waterway. The importance of the Strait of Hormuz for Qatar is more than other countries in the region. As the largest LNG producer and exporter, the country needs the stability and security of the region to deliver LNG to its customers (mainly in East Asia) at a specific time. Given the fierce competition in the global LNG market and the widespread investment of the US, Australia, Russia, Mozambique and in the LNG industry, any conflict in the region will cause not only part of Qatar’s share of the LNG market to be lost, but other countries will be able to replace Qatar as the largest producer and exporter of LNG. In the event of a military conflict in the region, the LNG market will also be damaged. The price of this product will increase and countries that simultaneously import oil and LNG from the region will be more harmful.Посмотреть изображение в Твиттере

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USQBC@USQatar

The #UnitedStates & #Qatar are #EnergyPartners. Qatar’s supply of #LNG is critical to global stability & a $30-$40B expansion project will ensure a stable supply. #USQatarBusiness208:35 – 9 июл. 2019 г.Смотреть другие твиты USQBCИнформация о рекламе в Твиттере и конфиденциальность

Maintaining security in the Strait of Hormuz is vital for all oil-exporting countries. If the Saudi and Emirate pipelines can reach the Red Sea with full capacity, and the UAE’s stockpile will be operational on time, and the need for these countries to use the Strait of Hormuz will be reduced. In this context, the strategic importance of the Strait will be reduced for exporters and consumers in the medium term. This would mean a geopolitical change in energy in the medium term.

Every country in the region relies on its stability and security in order to export oil and related products in time. Because of this, any conflict in the Strait of Hormuz is against the national interests of Qatar, which exports oil and is the world’s largest LNG exporter. LNG cannot be exported through the pipeline, and the country needs to export its LNG through the Strait of Hormuz, or suffer a decline in its share of the global LNG market and, consequently, a reduction in its foreign exchange earnings.

In a worst-case scenario, the oil market will suffer intensely due to a possible conflict in the region, or as a result of Iran taking action to close the Strait. Oil prices will increase, and energy security and economic growth will be faced with crisis. As a result of these considerations, the possibility of establishing a global consensus against any country closing the Strait of Hormuz will also increase.

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Energy investment fuels Saudi relations with Pakistan, India and China

audi Arabia uses oil and broader energy diplomacy to deepen the influence and impact of its foreign policy. One key pillar of Riyadh’s strategy is to use investment in other countries’ infrastructure to take larger shares in foreign markets and to decrease market share for rival nations.

Energy diplomacy is the interaction between two or more countries interconnected by various power-production or consumption sectors, including one or more components of trade, services, investment, technology and energy transmission. 

This kind of diplomacy deepens informal links, improves relations between countries and global engagement, and, in addition to economic and technological dimensions, can also address political and security dimensions.

Iran-Saudi competition 

Iran and Saudi Arabia, two regional rival powers in the Middle East with huge oil and gas reserves, compete on a variety of issues; however, the main confrontation between Tehran and Riyadh is on one matter: each wants to be the superior political actor in the Middle East. 

Tehran and Riyadh have faced off in geopolitical confrontations in the region for decades, including the recent wars in Syria, Iraq and Yemen, and over the presence of IS in the Middle East. The competing strategies have centred on weakening their rivals’ standing and stabilise their own position, investing in creating domestic and foreign political pressure on the rival country.

US sanctions

Iran’s largest export destination is primarily China, followed by the European Union, India and Turkey. In 2017, China imported an average of 700,000 barrels per day from Iran. China’s growing economy is dependent on oil imports – and focusing on energy sources is the primary objective of China’s National Energy Policy.

Between April and August 2018 India imported 658,000 barrels of oil per day from Iran


Before the US sanctions on Iran, Chinese companies were actively present in Tehran’s energy industry. Iran, meanwhile, had considerable involvement in China’s energy sector through providing reliable energy for rapid economic growth. As the partnership deepened, the Chinese firms strengthened their role as an influential actor in the Middle East energy market. 
India is Iran’s second-largest oil customer. Between April and August 2018 India imported 658,000 barrels of oil per day from Iran. India is also interested in getting more involved in Iran’s oil and gas exploitation and infrastructure projects.

Saudi investments

During a recent trip to Pakistan, which met with widespread praise from compliant Pakistani officials, Saudi Crown Prince Mohammed bin Salman announced Saudi Arabia’s willingness to “help” its economy. 

Saudi oil minister Khalid Faleh said he would invest $10 billion in oil refineries in the Gwadar Port on the Indian Ocean. Direct investment in Pakistan has declined by 17 percent in recent years, and the efforts of the Islamabad government to create interest among foreign investors in a direct presence in Pakistan have not had much effect. 

Foreign direct investment in Pakistan over the past seven months has fallen by $30 million compared with the same period last year. Pakistan’s economic situation gives Saudi Arabia an opportunity to influence Pakistani foreign policy and its relations with neighbours.

In 2014, Pakistan signed an agreement with Iran to import natural gas from the Islamic republic. But due to its financial problems, Pakistan is unable to construct a pipeline to import gas from Iran. India and Pakistan signed the TAPI project with the aim of importing natural gas from Turkmenistan. Saudi Arabia also showed interest in providing financial support for the TAPI project. 

All developments in the region show Riyadh is interested in playing a role in regional energy diplomacy and geopolitics.

Saudi Arabia has an active involvement in the Indian energy market and will use its investments to influence India’s foreign policy and reduce Iran’s role in the Indian energy market. In early 2018, Saudi Aramco held 50 percent of Indian refinery shares, with a value of $44 billion, and capacity to refine 60 million tons of crude oil a month. 

India is a major oil customers of both Iran and Saudi Arabia, and the two countries are working hard to get more from India’s energy market. Saudi Arabia has been planning a massive surge into south Asia, and has allocated cash from its $500 billion foreign investment fund to India. 

Aramco set up a new office in New Delhi to oversee its participation in the Indian energy market, and last year India invited Saudi Arabia to participate in the Strategic Reserves programme.

During MBS’ recent trip to New Delhi, his first official visit to India, it was announced Saudi Arabia would invest $100 billion in India over the next two years. Based on a $44 billion investment last year in the petrochemical sector, the $100 billion reported may not be far off reality. 

Could Saudi investments in Pakistan’s Gwadar port be a threat to Indian investment in the Chabahar port in the coming years?

China has major projects such as the one road belt and the sea silk route, which will increase the role of China in regional and global markets. The new Silk Road plan is designed to invest in the infrastructure of more than 60 countries and the development of two commercial routes, the Silk Road Belt and the Silk Road of the Sea, which were presented by China in 2013.

The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week



By becoming a crucial point on the route, Gwadar will become an industrial hub for the region, easily accessible to Central Asia, Afghanistan, the Middle East and Africa. 

Saudi Arabia also has geopolitical considerations in Gwadar. The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week, and Saudi Arabia, like most other oil suppliers, is investing in oil and gas companies in the long term for oil refineries and petrochemicals.

When bin Salman visited China, the leaders of both countries emphasised the need to develop bilateral relations and signed no fewer than 35 economic cooperation agreements worth a total of $28 billion at a joint investment forum. 

Saudi Arabia’s Aramco, the world’s largest oil exporter, will sign a memorandum of understanding with China’s Norinko Corporation to build a refinery and petrochemical project in Panjin, northeast China. Aramco also plans to raise the minimum stock in Zhejiang’s petrochemicals. Zhejiang’s petrochemicals division is building a refinery and petrochemical complex in the eastern province of Zhejiang. 

These investments help Saudi Arabia regain its position as the world’s primary oil exporter to China. Saudi Arabia is also strengthening its market position by signing oil supply contracts with non-governmental Chinese refineries. Riyadh also wants to play an important role in China’s One Road One Belt project.

Saudi investment in the Pakistan, India and China energy sectors gives an opportunity to play a key role in these countries’ energy security. Riyadh will be able to increase oil exports to these countries, while an Iran under sanctions will be unable to play an important role. 

If the US doesn’t extend its waiver to major Iran oil buyers, it is likely that Iran’s biggest customers – mainly China and India – will look to Saudi Arabia.

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MBS in China, Saudi Arabia’s new shift to Asia

The political and economic developments in the Middle East region are always at the forefront of the great world powers, and each power, using the leverage of political relations and investment, seeks to increase its presence and influence in the region using infrastructure projects to reduce the presence of competitors in this strategic region.

Major powers are always willing to have energy supplies from oil and gas producing countries, or if they can achieve it, they will prevent the control of energy sources and the routes of energy transit by rival powers.

China is now, and in the face of increasing economic growth since the 1980s, seeking to play an important role in global developments. The Middle East is one of the areas where Chinese politicians have been keen to import a significant part of the demand for oil from the Middle East. In order to increase its role, China has major projects such as the “One Belt, One Road” (OBOR) plan, which will increase the role of China in the regional and global balance of power. The new Silk Road plan is designed to invest in the infrastructure of more than 60 countries and the development of two commercial routes, the Silk Road Belt and the Silk Road of the Sea, which were presented by China in 2013.

Iran and Saudi Arabia as two main members of the Organization of Petroleum Exporting Countries (OPEC) have always had a special place in China’s foreign policy. China has paid special attention to Iran and Saudi Arabia in the road and belt project. During Saudi Crown Prince Mohammed bin Salman’s (MBS) recent visit to China, officials of the two countries emphasized strengthening relations between the two countries, strengthening the linkage between the two countries’ development strategies, increasing the level of cooperation in the design of the OBOR and noted the willingness of the two countries to adopt a common policy on regional and global issues from other summits.

Before MBS’s visit to China, Iranian Foreign Minister Javad Zarif, along with Iran’s Minister of Petroleum Bijan Namdar Zanganeh and their Parliamentary Speaker Ali Larijani, went to China. Zarif wrote about the visit of the Iranian delegation to China on Twitter, which was the main topic of the talks between the two countries, as “Iran’s role in creating a new silk road, as well as continued political, security and economic cooperation.”

 

During the visit, Zarif and Zanganeh discussed the future of China’s investment in South Pars Phase 11 as well as the continuation of China’s oil imports from Iran. The China National Petroleum Corporation’s (CNPC) withdrawal from South Pars has been a major concern for Iranian authorities, since Iran needs foreign capital and technology to increase its gas production capacity.

The framework of Larijani talks with Chinese officials was the political issues of the region and the fight against terrorism. During this trip, Chinese President Xi Jinping supported the “constructive role of Iran in maintaining peace and stability” in the Middle East and announced Beijing’s readiness to build close ties with Tehran on regional issues. The potential for cooperation between the two countries is high, but at present, the volume of trade between the two countries has fluctuated in recent years from $30 billion to $50 billion. The increase in trade between the two countries has been one of the issues raised by the two countries.

 

Tehran-Beijing Ties

 

The Chinese authorities assured Iran that MBS’s visit to China would not have any effect on Iran-China relations. Maintaining a balance in China’s relations with Iran and Saudi Arabia is of particular importance to Chinese politicians, because its energy security depends to a large extent on the oil coming from these two countries. Another important point is Iran’s influence on Shiite believers and Shiite groups in the region and the influence of Saudi Arabia on the Sunni block of the region has been, and remains, a concern of the Chinese government.

The policy pursued by the Chinese government against the Uighur minority should be arguably Saudi Arabia’s objection. Last week, the Turkish Foreign Ministry spoke of the Turkish government’s formal and strong stance on the Chinese government’s detention camps for the Uighur minority. It should be noted that while China has over 1 million people from the Uighur Muslim minority held in forced labor camps, the preservation of good relations between Riyadh and Beijing and the quest for a greater presence in the Chinese energy market seems to have been more of a concern for the Saudi government. Because of this, it has been silent about China’s policy towards the Uighur Muslim minority.

 

Joining Riyadh’s Program

 

During the visit, MBS called for China to participate in the 2030 Arabian program. Saudi Arabia’s 2030 program focuses more on renewable energy and reduces its dependence on oil exports. Saudi Arabia is leveraging investment to reduce Iran’s role as its competitor. They have been using the energy market in India, and if they want to do so, will not lose sight of this leverage to reduce China’s oil imports from Iran. Although Iran can also maintain its share in the Chinese oil market by offering special discounts to Chinese customers and also insurance on Iranian oil tankers. In previous years, Saudi Arabia has been demanding a boost to its European market by offering a discount to some Iranian oil customers. The competition between Iran and Saudi Arabia in the market for China’s energy will surely be in the interest of China and bring the country the necessary oil under convenient and affordable conditions.

 

Ready to Buy

 

Saudi cartels have always been a favorite of Saudi officials. Saudi officials are ready to buy Chinese drills, Saudi Arabia’s consumer market is a good destination for luxury goods and expensive Chinese companies, and Chinese companies want a more active presence in all commercial and infrastructure sectors of the country. Project 2030 presents an opportunity; it’s a good place for Chinese companies, because Saudi Arabia’s shadow boom does not threaten them. The U.S. sanctions have, despite the potential of all industrial sectors in Iran, prevented Chinese companies from investing in the current situation in Iran. As expected, Saudi Arabia and China signed a $10 billion energy deal during the crown prince’s visit. Under this contract, the Aramco State Oil Company and China’s Norinko Corporation have signed a $10 billion contract to build a refinery and a petrochemical complex in the city of Punjin in northeastern China.

 

After the killing of Jamal Khashoggi and Saudi Arabia’s isolation internationally, MBS’s travels to four Asian countries can signal the importance of Asia in its new foreign policy. Iranian and Saudi officials traveling simultaneously to Beijing indicates that Iran and Saudi Arabia are calling for China’s support in regional and global equations. Given the tensions in relations between Iran and Saudi Arabia in recent years, China can also serve as a mediator for the normalization of relations between Iran and Saudi Arabia.

 

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