It is surprising how the oil market is reacting to the risks of threats and incidents concerning shipping lanes around the Arabian Peninsula. Yemen’s Houthi rebels attacked two giant Saudi oil tankers in international waters west of the port of Hodeida in Red Sea on July 25, which prompted Aramco to temporarily suspend oil shipments through the strategic Bab Al Mandab Strait at the southern end of the Red Sea.

While one of the very large crude carriers (VLCC) tankers was slightly damaged and missed the other, the incident underscored the seriousness of the situation, especially as it was inflamed by the head of Iran’s Revolutionary Guard, Mohammad Ali Jaafari, who claimed on the same day that Iran “is able to stop world oil shipments, at will”.

There is no doubt that the suspension of oil shipments through the Bab Al Mandab Strait is not going to be solely confined to Saudi Arabia, as reports suggest Kuwait and the UAE are considering similar measures. The attack is not just a threat to international trade but serious damage to an oil tanker could be a harbinger of severe ecological damage as well.

Oil-wise, it is estimated that in 2016, 4.8 million barrels a day (mbd) of crude oil and petroleum products flowed through the strait; of which 2.8 mbd headed north toward Europe, and 2 mbd from Europe into the Middle East and Asia. The volume is a substantial increase from the 3.3 mbd in 2011.

Crude oil passes either through the Suez Canal or through the 320km Sumed double pipeline bypassing the Suez Canal to the Mediterranean Sea with a capacity of 2.34 mbd. Therefore, Egypt would be directly affected if the shipments were suspended for a long time. In such an eventuality, oil shipments could be sent around Africa which would add distance and time to destinations.

European refiners shipping products southwards would have to incur additional costs by sending products around Africa. This makes the Yemen incident an international concern and not just for the Arabian Gulf economies.

Forbes magazine recently said that “The Red Sea is a very important shipping lane. If there is a major disruption, European powers, Egypt and the US would all have reason to intervene,” and thereby more effort is needed to end the Yemen war.

With respect to crude oil prices, it is not clear whether the incident affected their trajectory. Prices of Brent moved from $74.82 a barrel on the day of the incident to $75.12 a day later, but only to fall to $74.41 the next day. Prices have been gradually rising since the middle of July and driven by fundamentals.

It is possible the Houthis, prompted by Iran, staged the incident as a show of intent to what is happening around the more important chokepoint of the Strait of Hormuz. Iran has threatened many a time to close the Strait and thereby stop some 18 mbd from reaching international markets.

In recent months especially after the US pulled out of the nuclear agreement and re-imposed sanctions, the threats have taken a new twist because they are made at the highest level, such as by President Rouhani. The counter threats are also made by President Trump personally.

Until now, it is a war of words but 18 mbd is substantial compared to the “nearly 59 mbd of global petroleum and other liquids production moved on maritime routes in 2015,” according to the US Energy Information Administration (EIA). It goes on to say that “the inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices.”

Only Saudi Arabia and the UAE can partially bypass the Strait of Hormuz. In the case of Saudi Arabia, its East-West pipeline from Ras Tanura to Yanbu has a capacity of 5 mbd. The UAE can use the pipeline between Abu Dhabi fields and Fujairah to the tune of 1.6 mbd. The current total spare capacity for both pipelines is estimated by EIA to be 3.9 mbd.

Experts maintain that Iran is technically capable of blocking the Strait of Hormuz by “using a fleet of small craft, ballistic missiles and large numbers of ocean mines that would make the strait impassable”. But that would bring the wrath of the whole world and the risk may prevent the Iranians taking such drastic action knowing that it will backfire on them.

This perhaps explains why the oil market is not moved by the Iranian threats. This is not to belittle this risks. Wars usually start by words and it is incumbent on Iran to resolve its problems with the region by following a course of cooperation and not confrontation.