Panoramic view of the Kharg Island port oil terminal, 25 km from the Iranian coast in the Persian Gulf and 483 km northwest of the Strait of Hormuz, Iran, March 12, 2017.
Fatemeh Bahrami | Anadolu | Getty Images
President Donald Trump’s order to attack Iranian military facilities on Kharg Island has thrust one of Tehran’s most important oil hubs into the center of the escalating conflict between the United States and Iran.
President Trump said the airstrikes carried out Friday night targeted military installations and saved oil infrastructure. But he warned that if Iran continued to attack commercial ships in the Strait of Hormuz, a key shipping artery for the world’s energy supplies, the United States could attack oil facilities on the island.
Vandana Hari, founder of Vanda Insights, told CNBC in an email on Monday: “The attack on military facilities in Kharg was intended as a warning shot towards Tehran. If the Strait of Hormuz is not reopened, the island’s oil infrastructure will be next.”
Kharg Island is considered one of Iran’s most sensitive economic targets. The eight-mile-long coral island, located about 25 miles off the coast of mainland Iran in the northern Persian Gulf, handles about 90% of the country’s crude oil exports. It also has a loading capacity of approximately 7 million barrels per day, making it an important gateway for Tehran’s energy revenue.
Iran’s economic lifeline
A direct hit to Iran’s export terminal on the island would immediately halt most of its 1.5 million barrels of oil exports per day, according to data provided by JPMorgan.
“If the oil infrastructure is destroyed, it will take years to rebuild and the country will lose its most important source of revenue,” Hari added.
“War risk insurance premiums are likely to remain elevated for a long time after the last missile is fired, and the behavioral response…will permanently reprice supply chains.”
jeff curry
Chief Strategy Officer, Energy Pathways, Carlyle
Energy analysts said the US government’s focus on Kharg reflects both the island’s strategic importance to Iran and its influence on global oil markets.
“Iran has other ports, but perhaps if the U.S. takes control of or destroys Kharg Island, it could do the same for other export facilities,” said Josh Young, chief investment officer at Bison Interest.
Andy Lipow, president of Lipow Oil Associates, said damage to the facility could severely disrupt exports, but Iran has limited alternatives.
Lipou pointed out that Iran has access to a pipeline from Goreh to Jask, which bypasses both Kharg Island and the Strait of Hormuz and can transport around 1.5 million barrels per day.
Still, analysts warned that the attack on Kharg Island still represented a major escalation.
Edward Fishman, a senior fellow at the Council on Foreign Relations, said, “[Iran]will likely escalate by further attacking energy infrastructure in the region, such as Saudi Arabia’s Abqaiq,” referring to Saudi Arabia’s large oil processing facilities.
Carlyle’s Jeff Currie said the conflict is accelerating structural changes in how energy supply chains are priced.
Kharg Island’s damaged infrastructure cannot be repaired by fire, the former Goldman Sachs commodity chief wrote in a memo.
“War risk insurance premiums are likely to remain elevated for a long time after the last missile is fired, and behavioral responses such as hoarding, contract renegotiation, and competition for alternative suppliers will permanently reprice supply chains,” he added.
Currie said the world is moving toward a new energy paradigm where security risks are built into commodity prices.
Oil prices exceeded $100 per barrel on Monday. The international benchmark Brent price was up 0.88% at $104 per barrel as of 9:48 p.m. ET.
“Any product that has to pass through a chokepoint will likely come with a safety premium,” Curry wrote.
This means that for oil markets, a threat to Kharg Island could be almost as important as an actual attack.
—CNBC’s Sam Meredith contributed to this report.
