The war against Iran to a decidedly bad turn from where the President of the US sits in the last few days. The Houthi rebels in Yemen, who are allied closely with Iran, have taken the Red Sea port of Mocha and some islands in the Bab al-Mandab strait at the southern end of the Red Sea. In effect, they control who can sail in and out of the southern end of the sea. At the moment, they have said that shipping is open to all except the Saudis, with whom they have been at war for some time. This makes Saudi oil exports more problematic, and it ensures oil rises from its current $100+ level.
The Bab al-Mandab is strategically important because it is one of two exits from the Red Sea — the other being the Suez Canal. When the US attacked Iran, the latter closed the Strait of Hormuz, through which much of Saudi oil traveled as it left the Persian Gulf. The Saudis relied on their pipeline running from the east to west, sending the oil to the Red Sea rather than the Persian Gulf. That pipeline has also been bombed and shut down. When/if it is repaired and reopened, there is still no easy way out of the Red Sea. Bab al-Mandab will remain a war risk, and the Suez Canal is not big enough for fully laden VLCC and ULCC tankers. In short, there is no ceiling to oil prices while the floor is around $100 a barrel.
The success of the Houthi offensive is less a testament to their proficiency with arms (although they can shoot straight) and more an indictment of the way the defenders have acted for a while.
“The Houthis committed everything they had – waves upon waves of fighters … along with their available ballistic missiles and weapons,” a senior Yemeni source attached to their military forces told CNN. The source said he contacted the United States Central Command (CENTCOM) and was assured the US was “watching the situation closely and that Saudi air support was coming.”
“But the air support never came,” the source said. “And Mocha has now fallen.”
In fact, Saudi leader Mohammed bin Salman spoke to President Trump twice on Thursday, urging the Americans to bomb the Houthis. Mr. Trump chose not to do so. “The Houthis called us and they don’t want to fight with us,” Mr. Trump said. “They don’t want us to go after them.”
CNN added:
Houthi fighters arrived in Mocha on Thursday to find Yemeni battalions that were severely depleted – their rosters were filled with “ghost names” receiving salaries, and the actual strength of the army was only about 20% of what it was on paper, a Western source with knowledge of the operations told CNN.
That was compounded by the fact that the United Arab Emirates – once a member of the Saudi-led coalition in Yemen – withdrew its remaining forces from the country in January, after Saudi Arabia called for them to leave amid a dispute. And Saudi Arabia did not backfill those troop barracks and bases.
Professor Fawaz A. Gerges of the London School of Economics said, “This new development gives the Houthis important leverage with Saudi Arabia, their staunch enemy, and also the global trade system. As a result, Iran is in a stronger position now to increase the pain to the U.S. economy and the world.”
It is clear that such a course is exactly what Iran plans to do. As things stand now, they have crippled the Persian Gulf states’ ability to export oil, which makes war that much harder. The US has no interest in a ground war, and so, the big issue is how long can the US tolerate gasoline above $4 a gallon and diesel above $6? Iran is not doing well economically either, but as a theocratic dictatorship, public opinion there does not matter. So long as the Revolutionary Guards get their rations and pay, the regime is safe.
Sometime in the next month or so, the world will hit the operational floor for oil. As noted in a research paper by JPMorganChase in May, that level is the lowest amount of oil needed to keep the global energy system running. One cannot simply ride it down to zero as the system will freeze up long before that. The reasons include:
- Pipelines need internal pressure to move oil.
- Refineries need a steady supply of crude oil to process fuel.
- Terminals and transport networks need minimum stock levels.
The world has used much of the strategic reserves that have kept oil prices from blowing through the roof. The US is not planning on using the Strategic Petroleum Reserve again to help. Energynow.com reported,
… the SPR sits at its lowest level in more than four decades, in part because of a historic withdrawal during the Biden administration. Created after the 1973 Arab oil embargo, the reserve now holds 307.7 million barrels — a level not seen since the early 1980s, when it was still in the process of being filled.
Analysts estimate the SPR’s operational floor, the point below which it becomes difficult to function, lies somewhere between 150 million and 200 million barrels. [Energy Secretary] Wright, speaking separately with Bloomberg Television on Wednesday, said the reserve remains comfortably above that threshold.
One doubts the word “comfortably” is applicable. Reuters said yesterday, “Global oil supply and demand look set to fall further than previously expected this year, the International Energy Agency said on Friday, as a lack of progress in ending the conflict in the Middle East delays the return of normal Gulf oil flows into 2027 and sends fuel prices soaring.