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Israel, Iran and Imminent Supply Chain Risk?
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This Week’s Supply Chain by the Numbers for August 19, 2010

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What year was the Panama Canal opened?

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Israel, Iran and Imminent Supply Chain Risk?

There is a potential supply chain disaster lurking out there, maybe just days away – are you considering the possibilities? I am speaking about a possible attack by Israel – now potentially occurring within days – on Iran’s nuclear facilities.


The issue has been simmering for several years, with the US, Israel, and some European countries raising the alarm about Iran gaining nuclear weapon capabilities and what that might do to global and Israeli security. I have found very few supply chain managers giving the issue much attention – and am writing this week about whether that is smart or not.


I don’t mean to get into the politics here – just the supply chain implications of all this – but to get there we have to cover what is going on geopolitically.

Gilmore Says:

"An executive at a very large freight forwarder told me his company had indeed been doing analysis and scenario planning around the potential for an Israeli attack."

What do you say?

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After all the posturing, calls for sanctions, etc., over the past few years, some experts are now saying that if Israel (with or without tacit US support) is going to take action against Iran’s nuclear facilities, as it did on Iraq’s nuclear facilities back in 1981, it has to happen now to be effective.


Why? Because there came news this week that Russia will begin loading nuclear-fuel rods into an Iranian nuclear reactor on Aug. 21.


That has caused former US UN secretary John Bolton, among others, to say that if Israel is going to launch an attack, it has to do so before that reactor work is complete. That is because Iran could then use these fuel rods at its Bushehr reactor to produce weapons-grade material.

An attack later may not be feasible because any attack on the reactor once it is loaded with uranium fuel would risk radioactive contamination of the whole Persian Gulf region.


So…. we will see. Maybe something happens within days. Maybe something happens later. Maybe nothing happens.


But clearly this has the potential to be a major supply chain disruptor, at least in the short term. Companies ought to be thinking and planning for it.


So how would it play out?


Clearly, there would be an immediate and dramatic jump in the price of oil. How much?


Stephen Schork, one of the oil industry’s most respected analysts, last year had some interesting things to say to me when I first started tracking this issue.


“It's difficult to say for sure, but I think we would see an absolutely knee jerk rise in oil prices,” said Schork. “I can’t say how high, but we know we can get to $147, because we have been there before [in 2008], and it’s quite possible we could go higher than that.”


Ok, so we can expect a sharp bump in oil prices – but will they stick? Schork says that while oil and diesel prices would soar in the short term, how long the prices will stay elevated depends on two key factors: the Iranian response and whether that actually impacts the flow of oil.


The good news? Schork says that he can “guarantee that Israel won’t be attacking any of Iran’s oil production capabilities.” The tougher question – does it lead to war in the Middle East? “That’s a wild card,” Schork said.


Schork also believes that the US and Iran’s Middle East neighbors would not tolerate Iran retaliating by, say, trying to shut down the Suez Canal, through which much oil flows.


“There’s not a lot of love lost between the Arabs and the Persians [Iranians],” Schork notes. “Many of the Arab countries would be privately quite happy to see Israel eliminate Iran’s nuclear capabilities.”


Of course, wider war breaking out, leading to a closure of the Suez Canal, would not only impact oil prices and availability, but the flow of goods as well, with the Suez being one of the world’s most important waterways. More than 50 vessels a day pass through the canal. Many are oil tankers, but a much higher percentage comes from container ships - more than 6000 in 2009 in a down volume year.


Am I Paranoid?


Am I just paranoid about the potential of the event itself happening, and its potential supply chain impact?


Over the past week, I asked a number of organizations about their take on the potential problems here. One major ocean shipping consultancy and research firm basically told me “No comment.”  I think they didn’t want to touch the issue with a 10-foot poll.


Another major ocean carrier said “We aren’t able to comment on this,” implying they hadn’t really looked at it much.


Then, pay dirt. An executive at a very large freight forwarder told me his company had indeed been doing analysis and scenario planning around the potential for an Israeli attack, which he was willing to share with SCDigest on a confidential basis.

The good news – his company thinks the impact on supply chains will turn out to be minimal. It notes that Iran has no ability to block the Suez Canal directly – it would take the conflict escalating regionally for that to occur. While Iran could try to stop traffic in the Gulf of Oman, through which a lot of oil passes, the Gulf “is under a full control of the USA Navy and it’s doubtful that Iran will escalate such conflict to a war against the USA.”


The analysis said further that “If such an attack will happen we can assume with a high level of certainty that it will be coordinated at least with the US. Iran is so far away that any airstrike will have to be militarily coordinated with several Middle Eastern armies, such as Jordan, Saudi Arabia, Egypt (probably) and USA, which controls the sky over the Gulf. It would be very doubtful that the US would agree (even a silent consent) without securing first the supply of oil and ocean carriers access to the region.”


While the analysis expects “Countries like Lebanon and Syria will be probably forced to engage if not in a full war at least in limited conflict,” nonetheless “This will have minimal impact on the region’s supply chain.”


I am not so sure about that last part, but I respect the knowledgeable opinion.


Now more ominously: “The US will probably suffer from some terror attacks on transportation and carriers (air, ocean, oil refineries, oil lines),” but the analysis again believes the supply chain impact from those actions will be modest. Again, I am not so sure, even though I hope they are right.


The company concludes its analysis with this: “The idea of an Israeli attack carried without the collaboration and proper planning with the US and other regional leaders is false. It cannot be done. Therefore, the total impact will be shorter, no more than 1-2 months, and will have little real impact on world trade or supply chain.”


This says to me that an imminent, almost spur of the moment attack some are predicting within days is highly unlikely, and that if one were to occur later with at least silent support of the US, it would only be done after plans to secure oil and supply chain flows were in place.


Nevertheless, my view is this:


  • I would get some knowledge of the situation, and perform some analysis to see what risks such an event might pose to my supply chain.
  • I would be prepared for the potential of a rapid and at least medium-term spike in the price of oil.
  • I would be talking to my carriers and forwarders about any impact they see in my flow of goods into, out of, or through the region. Look also at your supplier’s supplier, that sort of thing.
  • If an attack does eventually occur, I would immediately start bulking up on inventories in case the conflict itself or the related terrorist attacks my source predicts significantly slow down international trade flows.

What supply chain impact do you see from a potential Israeli attack on Iran’s nuclear facilities? Should companies be doing more analysis to see how these potential events might impact them? How do you most smartly plan for a supply chain disruption that might not even happen? Let us know your thoughts at the Feedback button below.


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What year was the Panama Canal opened?