Why the global oil market is on a knife edge over regional tensions

Current events are similar to the “Tanker War” in the 1980s in the later part of the Iran-Iraq war

One of the two tankers attacked in the Gulf of Oman last week. AP

It goes beyond megaphone diplomacy – more like Friedrich Nietzsche's "philosophising with a hammer". Japanese Prime Minister Shinzo Abe's overtures in Tehran were brusquely rejected on Wednesday, and two tankers in the Gulf of Oman were attacked on Thursday. If the oil market's tepid response encourages complacency from the US or aggression from Iran, it could spark a much more serious conflagration.

US Secretary of State Mike Pompeo unequivocally blamed Tehran for the attacks. Discrepancies between the tanker owner's statement and the American account, the history of the Iraq invasion and the administration's casual relationship with facts, will make it harder to convince bystanders or sceptics.
Nevertheless, with due caution, it is likely Iran was responsible for the attacks and that the orders came from the top. The two sophisticated, near-simultaneous and widely-spaced attacks don't look like an accident, or someone exceeding their authority.
One ship was carrying naphtha, a light oil derivative, and the other had methanol, a flammable chemical. This choice of targets could be deliberate, avoiding a major crude oil spill, which prevailing winds would drive on to the shores of Iran and the eastern UAE. Such a pattern of calibrated escalation, sending an unmistakable message short of overt hostilities, was established by the damage to four tankers off Fujairah in May.
Current events have been compared to the "Tanker War" in the 1980s, the later part of the Iran-Iraq war. The geopolitical and military context is very different, as the current incidents are at a much lower level, and not part of a declared open conflict. Tactics and vulnerabilities have also evolved significantly since then.

But there are similarities in the oil market context. Despite the loss of much of Iranian and Iraqi supply, the 1980s were glutted by a surge of non-Opec output. Saudi Arabia had ramped up its production in 1986, causing a price crash, in frustration at its Opec partners' lack of discipline, before shaky co-operation was restored. Despite 451 attacks on ships by both Iran and Iraq, oil traffic continued, protected from 1987 by US escorts.
Now, despite the coherence of the Opec+ alliance, prices have been soft this year, and the International Energy Agency is predicting record non-Opec production gains next year. When markets have previously been on a knife-edge, as in 2008, Middle East tensions were supposed to be adding $10 per barrel to prices. Thursday's attacks caused a modest 4 per cent rise.
The traders' calculus is difficult. The slowing world economy and threats to trade dent demand. Global inventories have been rising despite Opec's long-running attempts to bring them down, but some of this may be precautionary stocking against interruptions. Spare production capacity is ample to cover disruptions from Iran, Venezuela or other places, but most is held in Saudi Arabia and its Gulf allies, so they would be vulnerable to shipping interruptions. 
The multiple places targeted – Fujairah, the Gulf of Oman, Saudi Arabia's Red Sea pipeline and, last July, two Saudi tankers in the Bab El Mandeb – do not include the most-watched Strait of Hormuz. 
Low-tech Somali pirates caused havoc off the Horn of Africa around 2007-11, until international navies stepped up their presence. It would be hard for US warships to protect tankers in the vast expanse of the Gulf of Oman from small limpet mines, detonated after a long interval, or drone attacks.
Iraq tries to remain friendly with Iran while not angering the US, recently securing crucial waivers on imports of gas and electricity from its neighbours. If Tehran really wanted to shake the world oil market, this is the easiest place for them to do so. Iraq's vital exports, almost 4 million barrels per day, the second-largest in Opec, come from creaking offshore terminals, where sabotage might look like a technical breakdown.
The limited price action so far may be frustrating for Iran. Its ability to profit from higher prices is greatly reduced by the collapse in its exports under US sanctions. Waiting for a Democrat in the White House in 2021 is risky – Donald Trump may win again, or a replacement might not rejoin the nuclear deal. So Iran could have hoped to send a signal that further escalation in the Gulf would cause an oil crisis that would bode ill for the incumbent's hopes of re-election next year. That is harder when the market remains soft.
Assuming it is indeed behind the incidents so far, Tehran could move to more aggressive levels, betting on Mr Trump's unwillingness to be sucked into another war in the Middle East, and planning on de-escalating with negotiations. Something like that may have worked for North Korea's Kim Jong-un, but would be very risky.
Some US officials casually see military action against Iran as a re-run of 1988's Operation Praying Mantis, a retaliation against Iranian forces attacking Gulf tankers, or as the Reagan administration did Muammar Gaddafi's Libya in the 1980s, an ultimately inconsequential troublemaker that needed an occasional swat.
Yet, runaway escalation could have all kinds of unplanned consequences, such as opening the door for Russia in the Gulf, or unleashing chaos from which Tehran could forge strategic victory from military defeat. The energy market may be right to be sanguine for now, but dangers lie a few steps ahead.

Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis