How the Iran-Iraq war shaped oil markets regionally and globally

The war had a long standing impact on the energy sector in both Iraq and Iran

The Singapore flagged 85-thousand ton Norman Atlantic stands ablaze 06 December 1987 after she was attacked by an Iranian warship in Omani territorial waters as it approached the Strait of Hormuz.  The Iranians attacked 2 tankers in the region killing one aboard the Danish tanker Estelle Maersk and setting the Singapore tanker Norman Atlantic ablaze.  The Tanker War started properly in 1984 when Iraq attacked Iranian tankers and the vital oil terminal at Kharg island. Iran struck back by attacking tankers carrying Iraqi oil from Kuwait and then any tanker of the Gulf states supporting Iraq. The air and small boat attacks did very little to damage the economies of either country and the price of oil was never seriously affected as Iran just moved it's shipping port to Larak Island in the straights of Hormuz.  AFP PHOTO NORBERT SCHILLER (Photo by NORBERT SCHILLER / AFP)
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Napoleon once notably said, “A revolution is an idea which has found its bayonets”. Forty years ago, when Iraqi tanks rolled across the Iranian border on September 22, 1980, after early skirmishes and Iraqi complaints of incursions into disputed border regions, they invited the not yet two year-old Iranian revolution to unsheathe those bayonets. The consequences have shaped the Middle East and the world oil system ever since.

Energy was in the firing line immediately. The oil-rich province of Khuzestan was the main target of Saddam Hussein’s aggression. The giant Agha Jari oil-field and the huge Abadan refinery on the Iranian side of the Shatt Al Arab were immediate targets. Just eight days into the war, Iran bombed and badly damaged the Osirak nuclear reactor near Baghdad. The Iraqis would attack the under-construction Bushehr nuclear power plant several times during the conflict.

In April 1982, Iran’s ally, Syria, shut down the Iraqi pipeline through its territory to the Mediterranean. With Iraq’s narrow Arabian Gulf frontage also unusable, the country’s oil exports were mostly cut off. They would not revive until a new pipeline through Turkey was finished in 1986. Output, which had hit a record 3.5 million barrels per day in 1979 just before the war, would not exceed that until 2015, under a very different management.

Meanwhile, Iran’s exports, which had collapsed during the revolution, were also hit by air attack. They revived from 1982 but have never come close to regaining the levels of 1973-78 in the last years of the Shah.

During 1984-88, both sides attacked shipping throughout the Gulf in the “Tanker War”, with hundreds of ships damaged. The American and Soviet navies ended up protecting reflagged neutral tankers, and the US involvement marked a major escalation in its direct military presence in the Gulf.

Eventually, the bloody stalemate on the ground and growing disillusionment, the American threat and the 1986 collapse in oil prices, together forced Ayatollah Khomeini to accept a ceasefire in 1988.

The political ramifications were also profound. The demands of national defence allowed the Iranian revolutionaries to consolidate power. Much of the regime’s current paranoia, its attempts at self-sufficiency and its attempts to engage its enemies in the theatres of Iraq, Syria, Lebanon and Yemen rather than on Iranian soil, stem from the wartime experience.

Today’s Supreme Leader Ali Khamenei was president for most of the war; current president Hassan Rouhani was on the supreme defence council and an early player in the US’s Iran-Contra scandal. Much of the esprit de corps and personal relationships of the Revolutionary Guards, including men such as former president Mahmoud Ahmadinejad and foreign expeditionary mastermind Qassem Soleimani, were forged on the battlefields. These have now burgeoned into corrupt business networks that distort the Iranian economy.

The war has three major energy lessons. The first is the great vulnerability of the Middle East's oil industries to military action. Despite inadequate and uncoordinated deployment of their (for the time) very modern air-forces, both sides inflicted severe tit-for-tat damage on each other’s facilities. Through air, naval and political action, they were able to choke the enemy’s economic lifeline.

The second lesson is the cost of modern warfare, which far outweighs the value of capturing petroleum assets. Iraq emerged with $86 billion (Dh315.8bn) in debt, a ratio to gross domestic product of 278 per cent. With a large and unemployed army, Saddam was tempted to solve his economic problems by bullying his Gulf neighbours to cut production, then to invade Kuwait in 1990, bringing down on Iraq a yet greater catastrophe.

The scars of those two decades of dictatorship, war and sanctions on Iraq’s mutilated economy and politics have never healed. But the George W. Bush administration in 2003 had not learnt the lesson. They expected a swift reconstruction of Iraq's oil sector after the US invasion, which would contradictorily bankroll the country’s reconstruction and bring down world prices.

Iran has rebuilt better. Its semi-isolation from the world economy, partly by choice, partly because of international and US sanctions, has been detrimental. Yet it has encouraged a rather diversified industrial base and export industry.

The third lesson is the unpredictable and chaotic long-term political and energy market impacts of conflict.

How would the energy world have evolved if Saddam had not launched his war? The early-1980s oil price spike would not have happened. The market to the mid-1980s would then have been much more oversupplied, with both Iran and Iraq pumping at normal levels. Non-Opec production, such as the North Sea, would not have developed as far and fast; the subsequent oil bust might not have been as long and punishing.

Saudi Arabia would have continued to face two strong rivals within Opec – in the case of Iraq, likely a growing one. If the pragmatism of Akbar Hashemi Rafsanjani, the post-war president, had taken hold earlier, Iran might have achieved what it has often promised but not managed, and become a significant gas exporter to its neighbours.

Without the Tanker War intervention and President Bill Clinton’s “dual containment” of the 1990s, the US military build-up in the Gulf, with all its consequences, may not have occurred. The Gulf would have continued to be geopolitically and economically important, and the looming threat of revolutionary Iran’s bayonets would have remained. But the region may not have obsessed military and oil market strategists to the neglect of eastern Europe and east Asia.

Forty years on, these consequences are apparent, even if the counterfactuals must remain speculation. Generations in Iraq and Iran have grown up under the shadow of the human, environmental and financial cost of Saddam’s criminal blunder and Khomeini’s intransigence. Perhaps no other event in human history has so well illustrated the fragility of oil wealth.

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