Oman was due to host a meeting on Monday between Iran and the Gulf states, to discuss reopening the Strait of Hormuz. Before the war it carried around twenty percent of the world’s oil exports and it has been largely closed since the end of February.
The meeting was postponed overnight. Iran said the postponement came at Saudi Arabia’s request. On the same day, the Houthis said they fired dozens of missiles and drones at a military airbase at Khamis Mushait in southern Saudi Arabia, targeting hangars, radar, runways and ammunition depots, and Saudi authorities issued emergency alerts in four southern cities.
The more consequential damage happened on Friday. Saudi Arabia’s East-West Pipeline, which carries roughly seven million barrels a day across the country to Red Sea ports, was struck by drones launched from Iraq and damaged in eight separate places. Riyadh has given no timetable for resumption. Traders say a prolonged shutdown could remove as much as four percent of global oil supply. Brent rose 3.2 percent to $108 in early Monday trading, WTI 3.3 percent to $103, before settling about one percent higher. The Houthis have also captured Perim Island at the mouth of the Red Sea, tightening their grip on Bab al-Mandab.
Read that sequence carefully, because it describes a very particular kind of failure.
The East-West Pipeline exists precisely because the Strait of Hormuz might close. It is the contingency. It is the plan that Saudi Arabia built, at enormous cost, to survive the exact scenario that is now happening. And it has been taken out by the same conflict that closed the primary route.
That is the difference between having a backup and having redundancy, and almost nobody gets it right.
A cafe understands the mechanics instantly. You have two suppliers for your house blend, which sounds prudent, and you feel organised about it. Then the port strike arrives and you discover both of them import through the same terminal. You had two invoices and one route. What you had was a second phone number, not a second supply chain.
True redundancy requires the backup to fail for different reasons than the primary. Two suppliers on the same dock is not redundancy. Two roasters sharing a green importer is not redundancy. A generator that runs on the fuel that is currently unavailable is not redundancy. A pipeline built to bypass a waterway, running through a country being attacked by the party that closed the waterway, is not redundancy either. It is the same risk wearing a different coat.
The test is simple and hardly anybody applies it. Do not ask what happens if my supplier fails. Ask what single event could take out both, and then go and look for it, because it is almost always there and it is almost always something upstream that you have never had to think about.
There is a second thing in this story worth noticing, which is what the postponement does to price. Trump posted that Iran wants a deal quickly and badly. Iran’s Mohsen Rezaei called it a distraction and said there would be no talks until Iran’s conditions are met. Meanwhile Washington has so far resisted Saudi requests for direct military intervention beyond intelligence support, and Crown Prince Mohammed bin Salman met the US regional commander in Jeddah on Monday.
A market can price a closed strait. It can price a reopened one. What it cannot price is a meeting that is always about to happen.
Both doors. Same street.
Source: Reuters, “Houthis attack Saudi Arabia as Gulf-Iran talks are postponed”
