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Iran’s decision to contest the Strait of Hormuz and interdict tankers seeking passage carries network effects beyond simply delaying shipments of oil.
When oil terminals use all of their storage capacity, the pipelines delivering crude from the oil fields are compelled to cease deliveries. When pipelines are forced to halt deliveries oil fields are forced to shutdown.
Such is apparently what is happening in Iraq, which has opted to declare “force majeure”, ordering a shutdown of many oil fields without compensation for the lost production.
Iraq's Oil Ministry sent a letter dated March 17, seen by Reuters, stating that navigation through the Strait of Hormuz has been severely affected by "unprecedented military activity," causing storage capacity to reach its limits.
"The international partners were unable to nominate tankers to lift crude, preventing exports despite the state oil company SOMO being ready to load shipments," the letter said.
"Based on the situation, the ministry ordered a full shutdown of production at affected concession areas, with no compensation arising from the measure under contract terms," the letter noted.
It is important to note that Iraq is ordering a full shutdown, and not merely a curtailing of production. Full shutdown means the wells cease pumping crude completely.
The piping within an oil well is designed for oil to flow, not for it to remain stationary. The longer oil remains stationary, the greater the potential for various substances such as paraffin to precipitate and obstruct the well itself. Other liquids can seep in and do significant damage. There are even potentials for microbial contamination.
While a brief shutdown carries only a minimal potential for such obstacles to restarting production, those potentials grow the longer the shutdown endures. The longer Iraq’s oil fields are off line, which many of them now are as of the government’s order, the longer and the more costly the process will be to restart production, and the longer it will take for full production to be restored.
An extended blockade of the Strait of Hormuz does not merely temporarily delay oil shipments. It threatens a long-term reduction in oil production capacity in the Persian Gulf, a reduction which will not be immediately eliminated once the blockade is even partially ended.
This is what Iran has done.
