Rising tension between the United States and Iran caused concern for oil supply and transportation when the U.S. killed Iranian major general Qasem Soleimani on January 3, 2020 in a drone strike in Iraq. In retaliation, Iran launched numerous ballistic missiles at targets inside Iraq including the Ain al-Assad airbase which houses U.S. troops. Protests continue in Baghdad this week and more rocket strikes have been reported in the city’s Green Zone, the heavily fortified area of the capital that houses the U.S. Embassy.

The initial escalation of force sent oil prices to multi-month highs of $68.91 and $63.27 for Brent and WTI crude grades, respectively, on January 6, 2020. A hot conflict in the Middle East could quickly disrupt oil production in some of the largest producing countries in the world. Iraq accounted for 4.6 MMBOPD of crude production in the fourth quarter of 2019 while Iran produced 2.1 MMBOEPD, according to secondary sources reported in OPEC’s monthly report.

Brent and WTI crude oil prices. Yellow line marks Jan. 3, 2020, the date Qasem Soleimani was killed by a U.S. drone strike in Iraq.

Brent and WTI crude oil prices. Yellow line marks Jan. 3, 2020, the date Qasem Soleimani was killed by a U.S. drone strike in Iraq.

Along with concerns that kinetic conflict might stop production at the wellhead, Iran has frequently threatened to prevent transportation of crude through the Strait of Hormuz, a narrow strait approximately a fifth of the world’s oil shipments pass through.

With a significant portion of global production and such an essential logistics chokepoint all being threatened by the possibility of a military conflict, Iran continues to be a major focal point for global oil markets and for U.S. policy.

“I think there’s an interest in the Trump administration to calm this down,” explained Ambassador Christopher Hill, former U.S. Ambassador to Iraq, and Chief Global Advisor and Professor of the Practice in Diplomacy at the University of Denver. “Iran has shown some restraint in that they have not killed any U.S. soldiers,” continued Hill, referencing that troops at al-Assad were warned in advance of the missile strike, “the president – any president – would have to go after Iran if we saw a successful attack against U.S. troops.”

“The enemy of my enemy is still my enemy” – a difficult balance

Ambassador Christopher Hill

Ambassador Christopher Hill

Conflict in the Middle East is complicated and runs deep. The assassination of Soleimani was a strain on the delicate balance in the region. “It’s important to understand that this was not some stateless guy living in a cave. Soleimani was a general in the Iranian military and had quite a larger following in Iran,” said Hill.

“In the view of many in the American military, Soleimani was responsible for the death of thousands of U.S. soldiers through his actions backing Shia militias in Iraq,” continued Hill. “I was in Iraq in June 2009 and an Iranian-funded Shia militia tried to kill me. Fortunately, the bomb went off in front of my vehicle, not under it. So, there is a feeling that something needed to be done, but back in Iran, he’s somewhat a hero. After all, he was a key player in organizing Shia groups to fight against ISIS.”

Adding to the geopolitical dimensions of Soleimani’s position as a high-profile general in Iran are sectarian issues at play throughout the Middle East. Once Saddam Hussein’s Sunni government was removed from power in Iraq, a Shia-led government was elected, making it something of a political pariah among its neighbors Sunni-led neighbors.

“Other countries in the region are concerned that their own Shia populations will become emboldened if the Shia government in Iraq is successful, so they have never fully supported Iraq,” said Hill. For several reasons including the lack of support from its neighbors, the central government in Iraq has been weak, leaving room for Shia militias, many of which Soleimani was responsible for organizing and funding, to take a more prominent role in politics in the country.

“Iran is tagged a terrorist state, and appropriately so – they support Shia groups such as Hezbollah – but it’s important to understand that the terrorism of al-Qaeda and ISIS is of the Sunni variety,” explained Hill. “Iran and these Shia groups in many ways led the fight against ISIS. The old Chinese proverb ‘the enemy of my enemy is my friend’ is more like ‘the enemy of my enemy is still my enemy’ in the Middle East.”

Despite Iraq electing a Shia government, and the strength of the Shia militias in the country, the Iraqi electorate is becoming increasingly fatigued with foreign powers in the country said Hill. “There has been a great deal of negative feelings toward Iran in Iraq, even though it is a majority Shia state,” he said. “They have seen Iran excessively interfere in their country, but with the killing of Soleimani you are seeing a shift in sentiment that maybe the Americans should leave with the Iranians.”

Stability and participation could offer a path forward

Uncertainty creates volatility in any market, and with tensions ratcheting up in the Middle East oil prices could see fluctuations. Following the drone strike that killed Soleimani and Iran’s response, oil prices have settled back below $65 and $60 dollars per barrel for Brent and WTI respectively. Both the U.S. and Iran appear to be acting careful before further escalating into what could become a hot conflict.

“Hope is not a good basis for policy, but we should hope that the Iraqis will name a new government, that Iraq’s Sunni neighbors will encourage Iraq’s Sunni population to be full participants, and that a new government will be able to stabilize things and get the economy going. Let’s hope too that that a new Iraqi government will not be pressing for the withdrawal of U.S. troops. We need some troops there to assist with the problem of ISIS,” said Hill.

How the U.S. and Iran will face escalating or deescalating tensions from here remains to be seen, but with so much of global production originating in the region, and major transportation lanes at risk, oil markets will continue to watch events in the Middle East with interest.

 

About the Author– Tyler Jones is an Associate Director at the energy consulting firm EnerCom, Inc. with experience in media, investor relations, and international studies. Contact: [email protected]

EnerCom, Inc. is the energy industry’s leading energy communication experts.  We can help you with corporate strategy, ESG, media and government and stakeholder relations to effectively communicate your company’s story.  Contact: [email protected]


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