IRAN-IRAQ WAR: THREATS TO GULF OIL EXPORTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00363R000400740020-9
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 34
• Document Creation Date: December 21, 2016
• Document Release Date: August 26, 2008
• Sequence Number: 20
• Publication Date: November 1, 1983
• Content Type: REPORT

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Iran-Iraq War:
Threats to
Gulf Oil Exports
An Intelligence Assessment
DIA review completed.
NGA Review Complete
NAVY review completed.
Top Secret
GI 83-10260C
IA 83-10121 C
Copy ; 17
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Iran-Iraq War:
Threats to
Gulf Oil Exports
An Intelligence Assessment
Office of Near Eastern and South Asian
Analysis;
Office of Global Issues; and
It was
Comments and queries are welcome and may be
directed to the Chief, Persian Gulf Division, NESA,
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Top Secret
NESA 83-10296C
GI 83-10260C
IA 83-10121C
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Iran-Iraq War:
Threats to
Gulf Oil Exports
tankers calling at Iran's Khark Island.
Key Judgments The delivery of five French Super Etendard aircraft to Iraq would
Information available significantly increase the possibility of a disruption of Persian Gulf oil
as of 28 October 1983 exports that are vital to the West. Iraq currently is embarked on a
was used in this report.
diplomatic offensive to exploit the threat posed by the Super Etendards in
order to gain financial relief or to press Iran to end the war. If its
diplomatic moves are unsuccessful, we believe Baghdad will attack oil
Iraq would have three objectives in attacking Iran's oil lifeline: to impair
Iran's warmaking capacity by denying it revenues, to force Iran to begin
negotiations to end the war, or, failing that, to force the Western powers to
intervene in the Gulf.
We believe that Iraq would- have difficulty stopping Iranian oil exports
unless it could conduct repeated attacks against tanker traffic. Iraq will
have too few Super Etendards to conduct intensive antiship warfare for a
prolonged period. Although international oil tankers would stay away from
Khark Island after the initial Iraqi attacks, we believe some probably
would return unless the Iraqis maintained effective attacks over an
extended period. To encourage continued tanker loadings, we believe that
Iran would reduce oil prices to offset increased chartering and insurance
rates. The excess world tanker capacity would also encourage shipowners
to continue serving Khark.
If its antiship strategy failed, Iraq might launch a large-scale bombing
campaign against Khark Island's facilities. This option is less attractive to
Iraq than using the Super Etendards, partly because of the heavy losses
that would be incurred.
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Iran's response to Iraqi attacks on its oil exports probably would be
graduated. Iran might not move immediately to close the Gulf. If Iraq had
not substantially reduced Iranian oil exports, closing the Gulf would create
an economic predicament for Iran similar to that of Iraq. Moreover, by
showing restraint, Tehran ce on Iraq the onus of threatening
international oil shipping.
Nonetheless, we believe that some Iranian military reaction is likely, and
we cannot rule out the possibility that hardliners in Tehran might persuade
the regime to take the most extreme military reaction at the outset of Iraqi
attacks on Khark Island. The following options from which Iran might
choose are listed in order of estimated likelihood of occurrence, beginning
with the most likely:
? Attack the Iraqi oil pipeline through Turkey.
? Attack Kuwaiti oil facilities.
? Harass ships serving Iraq's principal Gulf allies.
? Strike oil facilities in the UAE, Bahrain, Qatar, or Saudi Arabia.
? Close the Strait of Hormuz using mines or a blockade.
Iran can carry out each of these options if it is operating against only the
forces of the other Gulf states. Iran could not long resist Western
intervention. Launching occasional air, naval, or commando attacks on a
few vulnerable Gulf oil facilities, however, could inflict extensive damage
and could have considerable psychological impact on oil markets in the
short term
The Gulf states' reactions to Iranian military moves would be sharply
different, depending on whether Tehran directly attacked their oil facilities
or limited itself to moves against international tanker traffic such as
mining, blockades, or harassment of shipping. If Iran directly attacked the
Gulf states' facilities, they almost certainly would defend themselves and
seek US military assistance.' Saudi Arabia and Oman would be most
willing to allow US forces to use their bases to counter direct Iranian
attacks.
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If Iran did not directly attack their territory or oil facilities, the Gulf
Arabs, in our judgment, would be unwilling to use their military forces to
confront such Iranian actions as mining or blockading the Gulf or
harassing tanker traffic. The Gulf Arabs would attempt strenuously to
avoid involvement in hostilities and would look to the West to remove the
Iranian threat. Oman, and to a lesser degree Saudi Arabia, probably would
be willing to assist a Western military reaction by nrovidine access to
facilities such as airfields for logistic support.
Each escalatory option would have different effects on the oil market, but
the more drastic ones could have economic repercussions for the West even
more severe than those of the supply disruptions in 1973 and 1979. A
prolonged closure of the Strait of Hormuz would stop current exports of 8-
9 million barrels per day and cause the price of oil to double or triple, de-
pending on the level of demand in consuming nations.
The impact of other escalation scenarios is more complex, but, according to
our analysis, for every 1-million-b/d net reduction in annual world oil
supplies, official oil prices could rise by approximately $8 to $10 per barrel
and OECD growth could decline by 0.3 to 0.4 percentage point, depending
on the absolute size of the disruption. Spot market oil prices, however,
could rise much higher. Current excess productive capacity outside the
Gulf could make up most of the oil exports lost if Khark Island was shut
down, the Iraqi pipeline through Turkey was severed, and Kuwaiti exports
were stopped. Those reductions would remove most of the slack in the
market, however, and expectations of additional supply losses probably
would drive up prices.
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Iraq's Predicament
Iraqi Strategy
Employing the Super Etendards Against Tankers 3
Effectiveness of Iraqi Attacks 8
Initial Response 9
Attacks on the Turkish Pipeline 10
Harassment of Gulf Shipping 11
Economic Impact of Disruptions of Gulf Oil Exports 17
Western Dependence on Gulf Oil 18
Managing an Oil Crisis 18
Sensitivity Analysis 18
B. Impact on the International Financial System
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Iran-Iraq War:
Threats to
Gulf Oil Exports
Iraq's Predicament
Iraq's inability to resolve its severe economic problems
has forced Baghdad to seriously consider escalating
the war in the Persian Gulf. The war with Iran is
slowly strangling Iraq's economy. It has severed two
of Iraq's three oil export routes
reducing annual revenue by near y
three-fourths and saddling the economy with war-
related costs that may be $1 billion per month.
We believe that 1984 could be a critical year for the
Iraqi economy. Our analysis suggests that Iraq faces
the prospect of a current account deficit nearly as
large as this year's $15 billion deficit unless it takes
the political risks of deeper cuts in imports of consum-
er goods. Meanwhile, its reserves will be further
depleted, and, because of declining oil revenues, the
Gulf states probably will be less able to provide the
necessary financial support to prevent Baghdad from
having to implement a new round of austerity meas-
ures. Moreover, because it has deferred repayment of
some foreign loans until next year, some of Iraq's
debts will come due in 1984.
Iraqi Strategy
We believe Baghdad is embarked on a major diplo-
matic offensive to convince the international commu-
nity that it has no choice but to consider military
escalation. We believe Iraq's diplomatic efforts will
fail to resolve its economic problems soon enough,
however, and Baghdad eventually will escalate the
war.' The objective of military escalation would be to
impair Iran's warmaking capacity, to force Iran to the
negotiating table, or to compel the Western powers to
guarantee, safe for Iraqi oil exports through
the Gulf.
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The instrument of escalation probably would be the
Super Etendards armed with Exocet antishi missiles
that Iraq is purchasing from France.
Another possibility is that Iraq may attempt to re- 25X1
sume oil exports from the Gulf, hoping the threat of 25X1
attacks by the Super Etendards would deter Iranian
interference. If Iran did attack Iraqi oil tankers,
Iraq's attempts to resume exports would demonstrate
that Baghdad had exhausted every alternative to
escape its financial bind. Any subsequent escalation
would be more easily justified as essential to the 25X1
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Because 90 percent of Iran's oil exports pass through
Khark Island, Iraq has three options to reduce sub-
stantially Iranian oil exports:
? Stop the flow of oil into Khark by bombing pipe-
lines, pumps, or manifold stations on the mainland.
? Destroy tank farms, pipelines, manifolds, or loading 25X1
points on the island.
? Force tankers to stop calling at Khark by repeatedly
attacking those trying to load there.
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A Possible Attempt to Reopen
the Gulf to Iraqi Oil Exports
Baghdad may plan to use the Super Etendards
primarily to dissuade the Iranians from interfering
with a resumption of Iraqi oil exports from the Gulf
Iraq could not defend its tankers along the length of
the Gulf if Iran decided to attack them. Tankers
serving Iraq could complicate Iranian attempts to
identify them by entering shipping routes near Kuwait
and then sailing down the Gulf
Attacks on Khark Island Facilities. Iraq has never
attempted to conduct the sustained, high-intensity air
campaign necessary to shut down Iranian oil exports.
Sporadic Iraqi attacks on Iranian oil facilities suggest
that Iraq can identify important targets and occasion-
ally bomb them with good accuracy
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Table 1
Persian Gulf Air Order of Battle
Iraq Iran Saudi Qatar Kuwait UAE Bahrain Oman
Arabia
the tank farm and the jetty at Khark, for example,
were struck in 1981. Key pump and manifold facilities
on the mainland also have been damaged, but these
facilities are not critical. Gravity would keep the oil
flowing at rates well above Khark's current exports of
about 2 million b/d
The only mainland targets Iraq could destroy to
reduce exports from Khark would be the pipelines,
and they would have to be struck regularly because
they are easily repaired.
The Iraqi Air Force on paper has the capability to
destroy loading facilities at Khark. It has overwhelm-
ing air superiority (see table 1) and should be able
eventually to shut down Iranian oil exports through a
major air campaign. Such a campaign, however,
would risk heavy air losses from Iranian ground-based
defenses. Iran also flies regular fighter patrols and
keeps naval patrols near Khark. To date Saddam has
used conservative tactics to avoid losses. In our judg-
ment, the potential for heavy losses and the complex-
ity of a systematic attack against Khark's heavily
defended installations make this option less attractive
to the Iraqis than attacks on shipping.
Iraq also could decide to use its Scud surface-to-
surface missiles against Khark. The island is some
200 kilometers from Iraq, but in late October Iraq
successfully attacked the Iranian city of Behbahan,
almost exactly the same distance from Iraq, with
Scud missiles. Iraq could not be confident of hitting
specific installations on Khark with Scuds but, in- 25X1
stead, would have to saturate the island to ensure a
high probability of striking a vital installation
Employing the Super Etendards Against Tankers.
The simplicity and low risk of using the Super
Etendards make it the most likely weapon Iraq would
use against Iranian oil exports.' The military conserv-
atism of the Iraqis will affect the way they would
employ the Super Etendards against oil tankers.
' Super Frelon helicopters armed with Exocets have the range to
reach Khark Island, but their slow speed makes
them too vulnerable to Iranian fighter aircraft and air defenses.
Instead, the helicopters have been used against merchant shipping
in the northern Gulf. The Iraqis probably could conduct regular
bombing raids using conventional munitions to keep tankers away
from Khark Island, but, in Iraqi hands, such weapons would require
more sorties and probably would be less effective in sinking tankers
than Super Etendards armed with Exocets
Commando attacks also could be highly effective against Khark
or associated mainland facilities, but they would be risky and out of
character for the Iraqis. The Iraqi Navy is little more than a coastal
defense force and is unlikely to venture as far as Khark Island for
combat operations.
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Figure 1
Radius of French-Built Iraqi Aircraft Carrying Exocet Missiles
Boundary representation is
not necessarily authoritative.
Bandar-e
'Abbas
Strait of
Hormuz
Admin.
Line
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Combat radius: 350 nm high-low-high with/one external tank, one Exocet
460 nm high-low-high with/two external tanks, one Exocet
Analysis of past Iraqi practice suggests that Iraq
would try to minimize the risks to the Super
Etendards by:
? Flying MIG-25s for reconnaissance before Super
Etendard attack missions.
? Allowing only one or two Super Etendards outside
Iraq at any given time.
? Accompanying the Super Etendards with MIG-23
or Mirage F-1 fighters for air cover.
? Keeping the Super Etendards out of range of
ground-based defenses.
Cautiousness and distance will influence the choice of
initial employment options and route selection. A
direct, low-level approach to Khark Island is a possi-
ble tactic, but, fearing discovery close to Iran, Iraq
would be more likely to seek to avoid defenses rather
than to surprise them. Iraq probably would use a
high-level profile flying from southern Iraqi airbases 6
on a circuitous route possibly over Kuwait, then south
along the Saudi coastline, and east to Khark Island.
b The Super Etendards probably will be based initially at Qayyarah
Airfield in northern Iraq, where most of Iraq's other French-built
fighter aircraft are based. After a few weeks, during which the
aircraft would be prepared for combat operations, we would expect
the Super Etendards to be brought south to Tallil or Shaibah
Airfields. Tallil is 245 nm from Khark Island and Shaibah, 150 nm.
ly adjusting its flight path to seek the largest
radar return in its field of view, generally the
Cruise missile launched from aircraft, ships,
or shore facilities designed almost exclusively
for antiship operations.
Range: 50 to 70 km when launched from an aircraft.
Guidance: Active radar.
Warhead: 165 kg in two stages (shaped charge with
contact fuse to penetrate the target's hull and
a fragmentation charge with a preset time-
delay fuse).
Mode of operation: The pilot locks onto the target with the
aircraft radar, transfers the target to the
missile computer, and launches the missile.
The missile homes in on the target without
further guidance from the aircraft, continual-
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To ensure that only ships calling at Khark are struck,
Iraq probably would have to hit them at or near the
island. We believe that Iraq initially would attempt to
sink tankers near Khark, but not at the island itself, to
minimize the risk of encountering Iranian air defenses
or fighters.
If such attacks did not achieve the desired results, we
believe that Iraq probabl would attem t to sink a
tanker loading at Khark.
inking or setting a tanker afire at the loading
point might render the loading point itself unusable.
The Super Etendard could execute such attacks from
outside the range of Khark Island's I-HAWK sur-
face-to-air missiles, but the aircraft would be vulnera-
ble to Iranian fighters and naval craft.
We would not expect to receive any conclusive evi-
dence of an impending Iraqi attack with Super
Etendards against oil tankers. Increased Iraqi threats
to escalate the war would warn us that Baghdad had
If, as we expect, Iraq's Super Etendards initially are
stationed at Qayyarah airbase in northern Iraq, their
transfer to the south would signal that the aircraft
were ready for combat operations. Moreover, in-
creased Iraqi aerial reconnaissance near Khark, using
MIG-25 interceptors
? Even the five aircraft will not be used to their
maximum sortie rates
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past practice suggests the
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Iraqis will not conduct intensive attacks in a concen-
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? The Exocet may not be effective in sinking oil
tankers.
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? Foreign tankers may continue to call at Khark.
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The response of the international shipping industry to
Iraqi attacks on tankers is uncertain. We believe that
a reduction in service is likely after the first Iraqi
attacks but that some tanker owners probably would
resume service to Khark unless Iraq could launch
repeated attacks. The depressed state of the world
tanker market might encourage owners to accept the
risks involved as long as insurance and crews were
available. To keep the Khark run attractive to ship-
might underwrite tanker insurance on its own.
pers, Iran probably would reduce crude prices to
offset increases in charter and insurance rates, or it
Baghdad would probably intensify its attacks with the
Super Etendards and perhaps other aircraft if initial
strikes failed to bring movement to end the war or to
alleviate its financial problems. Should the Iraqis
continue damaging or sinking tankers, they would
virtually shut down international tanker traffic to and
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Effectiveness of Iraqi Attacks. Iran could not prevent
the Iraqis from sinking oil tankers, but several factors
suggest that Iraq is unlikely to keep Iranian oil
exports from Khark shut down for an extended period
using only Super Etendards and Exocets:
? With only five Super Etendards, Iraq's ability to
launch sustained, high-intensity attacks on shipping
is limited.
Iran's Reaction
Since the Iraqi-French Super Etendard deal became
public in late spring, senior Iranian officials have
warned that Tehran would close the Gulf if Iranian oil
exports are impaired.
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ness of the Exocet against oil tankers.
The effectiveness of the Exocet in the Falklands war
may have been overstated in the press. Out of Jive
missiles fired four launched from Super Etendards
and one launched from shore-three hit ships. The
ship that was hit by the ground-launched Exocet was
able to leave the combat area under its own power.
The two ships hit by air-launched Exocets sank, but
a major factor in one sinking apparently was poor
ship design. The Exocet's propellant began burning,
and afire raged through the ship. In the other sinking
of a ship by an air-launched Exocet, the missile may
have hit the wrong target.
Iraqi pilots probably will have little difficulty hitting
tankers with the Exocet, but several factors suggest
the missile may have a low probability of sinking
them. The Exocet's warhead is small relative to the
size of a supertanker, and the crude may provide the
ship some protection by dampening the effects of an
internal explosion from the Exocet's fragmentation
warhead.
missile's radar guidance will assess the center of
mass of a loaded tanker to be the superstructure that
houses the crew and ship control stations.
lah Khomeini made similar public threats in late
September.
Initial Response. We believe that some Iranian mili-
tary response is certain, and Iran can choose among
the following options:
? Attack the oil pipeline going from Iraq to Turkey,
Iraq's only remaining oil outlet.
? Attack Kuwaiti oil facilities.
? Harass ships serving Iraq's Gulf allies.
? Strike oil facilities of UAE, Qatar, Bahrain, or
Saudi Arabia.
Close the Strait of Hormuz using mines or a
blockade.
Several factors suggest that Iran's initial military
reaction may not be so drastic as mining the Strait of
Hormuz:
? Iran has about $13 billion in foreign reserves, the
equivalent of about one year's imports. This finan-
cial cushion could allow Tehran to adopt a wait- 25X1
and-see attitude for a time.
? By showing restraint, Tehran could argue that Iraq
is the real threat to international oil shipping,
thereby attempting to create a rift between the
Arab Gulf states and Iraq.
? Mining the Strait while Iranian imports and oil
exports are still flowing would create an economic
predicament for Iran that eventually would be worse
than that of Iraq.
? A drastic response to Iraqi attacks would raise the
possibility of a Western military response that Iran
could not effectively counter. 25X1
Iran could continue to export oil at about 20 percent
of current levels. Iran probably would continue to load
its own ships at Khark and shuttle oil from there to
anchorages near the southern end of the Gulf, as it did
in the early days of the war. By shuttling, Iran could
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ship at least 200,000 b/d, and it may be able to
purchase or lease additional tankers to increase this
capacity. In addition, Iran could continue exporting
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about 200,000 b/d from Sirri and Lavan Islands,
which are located in the southern Gulf at the outer
limit of even the most optimistic estimates of the
range of the Super Etendards.
We believe that Iran's choice and timing of a retalia-
tory option will be influenced by the effectiveness of
Iraqi attacks in disrupting Iranian oil exports, its own
military capability, and its perception of the likely
political and economic repercussions. Assembly
Speaker Rafsanjani, possibly the second most power-
ful man in Iran, indicated in a speech in mid-October
that Iran would not take the most drastic step of
closing the Gulf if Iran could still export at least 50
percent of its oil.
We would expect Iran's initial military response to be
at the lower end of the escalatory ladder; for example,
attacks on the Turkish pipeline, Kuwaiti oil facilities,
or general harassment of Gulf shipping.' Nonetheless,
we cannot rule out the possibility that hardliners in
Tehran, playing on the regime's ideological underpin-
nings, might get the regime to take the most extreme
military reaction at the outset of Iraqi attacks on
Khark Island.
Attacks on the Turkish Pipeline. On several occasions
this year Iranian leaders have publicly threatened to
attack the oil pipeline from Iraq through Turkey. We
believe that attacks on the pipeline probably would be
carried out either by commandos or Iraqi dissidents,
most likely Kurds, receiving Iranian support. All
known sabotage to the pipeline during the war has
occurred in Turkey, but any Iranian-sponsored attack
would harm Iranian-Turkish relations, a factor Teh-
ran must consider. The Iranians also could try to
destroy oil installations along the pipeline using fight-
er-bombers. Iran has not used this tactic for nearly
two years to conserve its dwindling number of opera-
tional aircraf
Damage to the pipeline
itself, in our judgment, would cause only a temporary
disruption to Iraqi oil exports because most types of
Potential Targets on the
Iraq-Turkey Pipeline
The two crude processing plants at Kirkuk in Iraq are
required for final stabilization and treatment of
produced crude before it can be shipped through the
Iraq-Turkey pipeline. Tehran demonstrated its abili-
ty to conduct successful air operations against these
facilities early in the war
when it damaged one of the plants. Our
analysis suggests that unless both facilities were
heavily damaged or destroyed, Baghdad could con-
tinue to export some crude oil; the two plants now are
operating at about two-thirds capacity.
The pipeline has five pumping stations, two in Iraq
and three in Turkey. Past sabotage, however, has
concentrated exclusively on the pipeline itself, which
has been repaired in a few days.
The seven gas/oil separation plants in the Kirkuk
oilfield-capable of handling more than 1.5 million
b/d-are required for crude oil production. The
Iranians are unlikely to target these facilities, in our
judgment, because they probably are aware that at
least one-third of the current capacity of the plants
would have to be destroyed to affect export levels.
We believe that damage to any other Iraqi oil
installations is unlikely to affect current levels of
crude exports.
damage could be quickly repaired. Damage to pump-
ing stations would cause longer periods of disruption
but the stations normally are well defended.
Attacks on Kuwait. Kuwait, the primary port for
heavy military equipment coming from the USSR to
Iraq, is the most visible of Iraq's Gulf supporters. Iran
has attacked Kuwait before with little international
reaction. We believe Iran would resume attacks on
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Kuwait to demonstrate its resolve to retaliate and to
involve directly Iraq's supporters. At the same time,
attacks against Kuwait at the northern end of the
Gulf might not affect oil exports from Saudi Arabia
or the UAE as long as the military action seemed
unlikely to spread. As a result, Iran might believe that
the Western powers would not intervene. We believe
that Tehran probably also would hope that other Gulf
states would blame Baghdad for making military
Iranian aircraft and ships could closely monitor ship-
ping through the Gulf and selectively turn back those
carrying goods to Iraq or its allies. The Iranian Navy
also could board suspect ships or even force them to
go to an Iranian port for search or detention of the
crew, as it did early in the war.
decisions that threatened their security.
The most critical economic target in Kuwait is the
Mina al-Ahmadi Island terminal, through which
flows all of Kuwait's current oil exports of 750,000
b/d. The Ahmadi Sea Island, some 16 kilometers
offshore, is highly susceptible to the kind of seaborne
commando assault used so effectively by the Iranians
against Iraqi offshore terminals. Iranian naval com-
mandos also could attack Kuwait's offshore oil-load-
ing buoys with a high probability of success. An
isolated air attack against those targets would, in our
judgment, be less effective.
Iranian air attacks against onshore berths, tank
farms, or processing facilities in Kuwait also could
inflict severe dama e.
egraded, the Gulf navies have nothing comparable to
Iran's destroyers and frigates (see table 2). We esti-
mate that Oman has the most competent Navy of the
Peninsula states, but its only meaningful combat
capability is provided by three missile boats armed
with Exocets.
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Moreover, Iran's naval base and airbase at Bandar
Abbas give the Iranians a major advantage in harass-
ing shipping in the Strait of Hormuz. Iranian units 25X1
are able to respond quickly to a potential confronta-
tion in the Gulf and have easy access to resupply and
repair facilities. Fighter aircraft stationed at Bandar
Abbas could threaten ships passing through the Strait
and provide cover for naval ships operating there.
Kuwait has a small but modern inventory of air
defense equipment, including 17 Mirage F-1 intercep-
tors and six HAWK surface-to-air missile batteries.
defense personnel poorly trained. We do not believe
Kuwait could effectively detect and defend against a
surprise Iranian attack
Harassment of Gulf Shipping. We estimate that Iran
has the capability to harass ships serving other Gulf
states,' and the other Gulf navies could not stop them.
In September Iran warned the Gulf states that it would restrict
shipping in the Gulf if they continued to ship arms to Iraq through
their ports. This tactic could bring Iran into confrontation with the
USSR, whose ships dock in Kuwait and is the only carrier taking
heavy military equipment to Iraq through the Gulf. The USSR
apparently is taking the Iranian warning seriously and has begun
The Gulf Arabs, in our judgment, are unlikely to
challenge Iran except in self-defense. Unless directly
attacked, the Gulf states would attempt strenuously to
avoid hostilities and would look to the West to remove
the Iranian threat. We believe their willingness to
support Western military moves would differ depend-
ing on the level of the threat. Nonetheless, they all
recognize that Iran can cause them long-term security
problems and would strongly prefer to avoid giving
the Iranians cause for retaliation.
If directly attacked, we believe the Gulf Arabs, with
the possible exception of Kuwait, almost certainly
would appeal to the United States for military assist-
ance. There are differences in the Gulf Arabs' willing-
ness to cooperate militarily with the United States,
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Table 2
Persian Gulf Naval
Order of Battle
Iraq Iran Saudi
Arabia
but, if under attack, most of the governments proba-
bly would allow US forces increased access to their
airfields or ports. Of these states, we believe Saudi
Arabia, Oman, and Bahrain would be most willing to
allow US combat operations to be launched against
the Iranian threat.
We believe the Gulf Arabs are unlikely to view
Iranian actions such as mining, blockade, or harass-
ment of shipping in the Gulf as direct threats to their
regimes. In such situations, all the Gulf states proba-
bly would be unwilling to use their military forces to
confront the Iranians. Oman, and to a lesser degree
Saudi Arabia probably would agree to assist a West-
ern military reaction by providing access to facilities
such as airfields or ports for logistic support. We
believe none of the Gulf states would allow US
combat operations to be launched against Iranian
targets from their territory if they were not under
To spread the war to Iraq's allies in the lower Gulf,
Tehran could use commandos or local dissidents to
sabotage facilities, or it could launch air raids against
onshore oil facilities.
The action that, in our judgment, offers Iran the least
risk with the highest likelihood of success is an
Iranian-backed sabotage operation by local Shia dissi-
dents. Iran has supporters on the Arabian Peninsula,
direct attack.
Attacks on Gulf Oil Facilities. If Iraq could reduce
the flow of oil from Khark by 20 percent or about
400,000 b/d for several weeks, Tehran would have to
begin drawing down foreign exchange reserves to
maintain current levels of imports. Recent demonstra-
tions in major Iranian cities suggest that a major
reduction of imports would be a politically volatile
issue. We believe that Iran would consider more
drastic retaliatory measures, hoping that pressure
from the international community would stop Iraqi
attacks.
The Gulf states have increased their individual and
collective security over local Shia populations, most of
whom have a vested interest in maintaining the status
quo. Bahrain's disadvantaged and disaffected Shia
majority is a potential source of conspirators to
support an Iranian sabotage operation,
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Isolated incidents of violence, including sabotage, are
possible, however, and if well planned could cause
considerable damage.
Because Iranian commando operations have proved
successful in the past, Tehran is likely to choose them
over air attacks, in our judgment. The oil production
and export systems of all the Gulf states are highly
vulnerable to this type of attack and difficult to
repair. The ground forces and coastal defense forces
of the Arab Gulf states could not, in our judgment,
prevent commando raids.
Air attacks would be riskier, but we believe that even
Saudi Arabia, the only Arab Gulf state that could
effectively defend against repeated Iranian airstrikes,
could not prevent some fighter-bombers from success-
fully attacking critical targets. We estimate that less
than one-third of Iran's 260 fighters are operational
probably would not attempt to sustain an air cam-
paign against Saudi Arabia's critical oil facilities once
the element of surprise was gone.
Closure of the Gulf. If Iraq could reduce substantially
Iranian oil exports-perhaps by more than 50 percent
to less than 1 million b/d-we believe Iran probably
would be forced to consider more drastic escalatory
reactions. As long as its own oil was flowing, Iran
probably would attempt to blockade the Strait before
attempting to close it by mining. Iran is likely to mine
the Gulf only as a last-ditch measure because it would
effectively close off the rest of its own oil exports and
its major route for importing goods. Moreover, this
step would force Iran to increase overland imports
through Pakistan, Turkey, and, most undesirably
from Tehran's perspective, the USSR.
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Our analysis suggests that, even if key Gulf oil
facilities sustained substantial damage, current oil
export levels might be restored within six months,
primarily because Gulf oil production facilities now
are underutilized. A more precise estimate of the
time to repair facilities would require a clearer
definition of the extent of damage.
Whenfeasible, temporary repairs, cannibalization, or
In our judgment, however, if a large number of
facilities have been heavily damaged, cannibalization
would not be a feasible option. In this case, some
facilities would take years to repair because many
critical components-for example, high pressure sep-
aration valves, loading arms, and crude stabilization
columns-generally are not stocked and would have
to be custom built. In this situation competing orders
would strain the world's manufacturing capability
and lengthen the time required to restore exports to
In our view, Iran has the capability to close the Gulf
temporarily by mining or by blockade as long as it is
not challenged by Western navies. We doubt that the
Gulf states would confront Iran on their own
If Tehran mined or claimed to have mined the Strait
of Hormuz, the perception of the shipping industry
would be at least as important as the actual capability
of the Iranian Navy. A simple declaration that the
Strait had been mined probably would be sufficient to
deter most shipowners from attempting transit for a
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ciency of their crews is suspect
Removal of sea mines normally requires specially
configured minesweepers and trained crews. Saudi
Arabia and Iraq have minesweepers, but the profi-
Consequently, we believe navies
Strait.
pends on the type of mines laid, the size of the area
suspected of being mined, and a variety of other
factors. Weeks could be required to sweep even a
narrow channel through the central portion of the
from outside t e Gulf would be required to clear the
Strait. The length of time required for clearing de-
missile patrol boats
Navy has three destroyers, four frigates, and 11
Iran also could attempt to blockade the Strait. Iran's
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The Strait's depth, width, and strong currents make
mining difficult. It is about 275 kilometers (km) long
and has an average width of some 80 km. Traffic is
separated into two shipping channels, each of which is
2 km wide and at least. 50 meters deer). F
fighter aircraft at two nearby airbases to back up a
Although Iran could place artillery on the islands of
Larak and Qeshm in the Strait, it could not close the
Strait by using artillery alone. To hit the shipping
lane closest to Iran, artillery on the islands would have
to be fired to its maximum, and least accurate, range.
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Figure 2
Strait of Hormuz
ma r u.rZ
Ra's al Khaymah - is
yniteea wrap
Boundary representation a
not necessarily authoritative. t
,r ;Hisn Dibii
II
0 37 91 183 meters
Geographical limit of the Strait of Hormuz
Iran-Oman continental shelf boundary
12-nautical-mile limit
Directed traffic lane
Kilometers
0
Nautical Miles
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Moreover, artillery batteries would have difficulty
hitting a moving ship even under the most favorable
conditions. Iran's longest range artillery can strike
targets at a distance of about 32 km.
Economic Impact of Disruptions
of Gulf Oil Exports
Each Iraqi and Iranian escalatory option would have
different levels of impact on oil markets and the
economies of the United States and other OECD
nations. Some of the more drastic options that result-
ed in a major, prolonged reduction of Persian Gulf oil
exports would have more severe economic repercus-
sions for the West than the oil supply disruptions in
1973 and 1979. Despite the fact that the United
States imports little of its oil from the Gulf, it could
not insulate itself from a major reduction in exports
from the area. Moreover, our analysis suggests that
even a modest runup in oil prices resulting from an
interruption of Persian Gulf oil exports would have
severe repercussions on the international financial
system (see appendix B).
We estimate that for every 1-million-b/d net reduc-
tion in annual world oil supplies, official oil prices
could increase by about $8 to $10 per barrel and
OECD growth could decline by 0.3 to 0.4 percentage
point, depending on the absolute size of the disrup-
tion. Spot market oil prices, however, could rise much
higher. Current excess productive capacity outside the
Gulf could absorb most of the oil exports that would
be lost if Khark Island was shut down, the Iraqi
pipeline through Turkey was severed, and Kuwaiti
exports were stopped. These reductions would, how-
ever, remove most of the slack in the market, and
expectations of additional losses probably would begin
to drive up prices.
The economic impact of any disruption of Gulf oil
exports in the near term would depend heavily on a
number of factors:
? Expectations of the duration and magnitude of the
disruption.
? The actual extent and duration of the disruption.
? The availability. of non-Gulf energy supplies from
surplus productive capacity.
? The availability of alternative fuels such as coal and
gas.
? Worldwide petroleum stock levels and stockholder
The present combination of surplus productive capaci-
ty and weak consumption affords OECD countries
considerable protection against a short-term oil supply
disruption. Persian Gulf countries have been produc-
ing some 12 million b/d in recent months, although
present productive capacity is about 17 million b/d.
Nine or 10 million b/d are now exported from the
Gulf, of which about 1 million b/d is sent through
pipelines. Current surplus capacity in non-Communist
countries outside the Gulf is about 3 million b/d,
mainly in Nigeria, Libya, Venezuela, and Indonesia
response.
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Western Dependence on Gulf Oil. Non-Communist
countries depend on Persian Gulf oil for about
30 percent of their needs. The United States, however,
is not so dependent on Persian Gulf oil as are most of
its Western allies and some Third World countries.
US imports of Gulf oil this year are about 300,000
b/d, primarily because of the sluggish economy and
the drawdown of excess stocks. US dependence on
Persian Gulf oil has dropped to only 5 percent of total
oil imports and 2 percent of oil consumption.
The other countries in the OECD-mainly Western
Europe and Japan-received 8 million b/d from the
Gulf last year, about 55 percent of their total oil
imports and 40 percent of their total consumption.
Most of the remainder of the Gulf's oil output is
consumed by the Gulf countries or exported to the
LDCs.
Managing an Oil Crisis. The United States theoreti-
cally could do without Gulf oil by drawing on surplus
capacity available outside the Gulf, including 1 mil-
lion b/d among major producers in the Western
Hemisphere. Because of the heavy dependence of non-
Communist countries on Persian Gulf oil, however,
the United States would not be immune to the shocks
of a major disruption in the Middle East oil supply.
Such disruptions could lead to a sharing of the burden
of the shortfall through adjustments in company
distribution systems, intervention of consuming gov-
ernments, or, under certain circumstances, implemen-
tation of the formal IEA oil sharing program.
the demand response to
rising oil prices and private stock behavior are the
main determinants of the price impact of a major,
prolonged supply disruption. Price runups following
the Arab oil embargo and the Iranian revolution were
due in part to demand pressures resulting from stock-
holders' efforts to rebuild and add to oil inventories.
In contrast, the oil market remained fairly stable
following the outbreak of the Iran-Iraq war, reflecting
falling consumption and the existence of about 400
million barrels of excess stocks.
Commercial stocks now represent the bulk of oil
inventories held in consuming countries
purchased and owned by governments as opposed to
inventories held by commercial firms-are located
only in the United States, Japan, and West Germany.
Other fuels, especially natural gas, also could help
offset oil losses during a disruption, as happened in
the United States following the Iranian revolution.
Stock drawdowns play a major role in reducing the
price impact of an oil supply disruption. If oil users
anticipate a short-lived disruption and a fairly quick
rglease of oil from stockpiles, the initial scramble to
build and hoard inventories that produced the severe
economic impact of the supply disruptions in 1973
and 1979 may be averted. As a result, a sharp
escalation in spot prices and the ensuing rise in
official prices may be dampened considerably.
We believe that a disruption of oil flows from the
Persian Gulf, however, would reverse the glut mental-
ity that has gripped the oil market for the last two
years. Industry expectations of a price decline com-
bined with the high cost of holding oil have caused a
large inventory liquidation since the beginning of
1983. With current commercial stockpiles near
normal levels, we would expect stockholders to be less
willing to deplete inventories sharply if there were a
supply disruption. In our judgment, there is a good
possibility that attempts would be made to increase
inventories because of the prospects for higher prices
and the uncertainty surrounding the duration of the
disruption. This behavior would add to our oil demand
estimates and projected supply shortfalls.
Sensitivity Analysis. Despite these uncertainties, we
have attempted to assess the sensitivity of oil prices
and economic growth of the OECD nations to various
escalation scenarios in the Persian Gulf. We used the
CIA energy model to calculate how far oil prices
would have to rise to balance supply and demand
under varying levels of disruption.
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If Khark Island were shut down, the loss of Iran's
exports of nearly 2 million b/d would have little
impact for most consumers. Surplus available capaci-
ty is sufficient to absorb the loss, but spot prices
probably would run up if buyers anticipate a spread of
the conflict. At a minimum, Iranian customers would
be forced to line up alternative supplies. Turkey,
Spain, and Italy rely on Iran for about 16 percent of
their oil import needs, while Japan relies on Iran for
13 percent of its needs.
If Khark Island were shut down, the Iraqi pipeline
through Turkey to the Mediterranean severed, and
Kuwaiti exports cut off, the impact of a combined loss
of about 3.5 million b/d would be more severe. The
loss would eliminate most of the surplus productive
capacity outside the Gulf and leave the oil-importing
countries exposed to high risks. The uncertainty sur-
rounding the length of such a disruption and the risk
to other suppliers in the Gulf would almost certainly
cause an increase in spot oil prices. Among major
importing countries, Brazil and Turkey rely on im-
ports from Iraq and Kuwait for more than 20 percent
of their supplies.
If the effects of a selective blockade of the Strait of
Hormuz were added, the impact on the West would
be severe. Stopping an average of one supertanker per
day, for example, could reduce Gulf exports by
2 million b/d.
A closure of the Strait and the Iraq-Turkey pipeline
would cause a net supply shortfall in the non-Commu-
nist world of 5-9 million b/d in early 1984, depending
on demand levels in the consuming nations (see table
4). We estimate that a prolonged closure would double
official oil prices-from the current level of about $30
per barrel-under a low demand assumption and
triple prices under a high demand assumption. If oil
prices tripled, OECD growth could decline by
4 percentage points.
Table 4
Scenarios for Reductions in Non-Communist
Country Oil Supplies
Million Barrels
Per Day
in Early 1984
Non-Communist country oil production
capacity
52
Available surplus capacity
Low demand case
8
High demand case
4
Persian Gulf capacity
17
Pipeline export capacity a
3
Domestic use
2
Strait of Hormuz
12
Net reduction from closure of Strait of
Hormuz and the Iraq-Turkey pipeline
Low demand case
5
High demand case
9
a Saudi Arabia's pipeline to the Red Sea can carry about 1.85
million b/d, and Iraq's pipeline via Turkey to the Mediterranean
can carry nearly 1 million b/d.
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Appendix B
Impact on the International
Financial System
a disruption of Persian
Gulf oil exports that would trigger only a modest oil
price increase to $35 per barrel could, if maintained
over several months, have severe repercussions for the
international financial system. Heavily indebted oil-
importing LDCs would be unable to finance higher oil
import bills and, barring new reschedulings, could be
forced to delay debt repayments. Unlike the major oil
price increases in 1973 and 1979, additional oil export
revenues would accrue largely to those countries with
high propensities to spend on imports instead of the
wealthy Persian Gulf countries, which in the past
have provided immediate liquidity to the international
banking system. Moreover, in our judgment, bankers
would be reluctant to recycle whatever new oil money
is deposited to such heavily indebted oil-importing
LDCs as Brazil, Chile, Morocco, and possibly the
Philippines. At the same time, IMF funds may be 25X1
inadequate to handle new loan requests.
Oil-Importing LDCs
Higher oil import bills and a slowdown in OECD
growth would pose insurmountable financial problems
for many oil-importing LDCs. In our judgment, major
debtors such as Brazil, Chile, Philippines, Pakistan,
Morocco, Sudan, India, and South Korea would have
trouble meeting scheduled external payments with
even an $8 per barrel price increase. Without liberal
rescheduling arrangements from private and official
creditors, they could be forced to delay repayments on
this external debt. Higher oil prices would also create
payments problems for many smaller Central Ameri-
can, African, and Middle Eastern oil-dependent econ-
omies with limited financial reserves.
Table B-1
Major LDC Debtors and Net Oil Importers:
Foreign Exchange Impact of a
Major Oil Price Income
Net Oil
Importers
Projected Net
Oil Imports,
1983
Projected Net
Oil Import Bill,
1983 at
Projected Cur-
rent Account
Balance
1983
Estimated Debt
in 1983 a
(billion US $)
Additional Foreign Exchange
Requirement If Oil Price, Rises to
(thousand b/d)
Current Prices
(billion US $)
,
(billion US $)
37 Per Barrel
(billion US $)
70 Per Barrel
(billion US $)
100 Per Barrel
(billion US $)
Brazil
700
7.6
-7.5
31.0
2.0
10.5
18.1
South Korea
530
6.1
-2.3
19.1
1.5
7.9
13.7
India
335
4.1
-3.4
2.7
1.0
5.0
8.7
Chile
58
0.8
-1.6
6.7
0.2
0.9
1.5
Philippines
200
2.2
-3.0
7.6
0.6
3.0
5.2
Morocco
95
1.0
-1.8
4.9
0.3
1.3
2.2
Taiwan
340
4.1
4.0
6.1
1.0
5.1
8.8
Thailand
230
2.6
-2.0
4.1
0.7
3.4
6.0
Pakistan
105
1.1
-1.3
2.0
0.3
1.6
2.7
Sudan
45
0.5
-0.7
0.4
0.1
0.5
0.8
Ivory Coast b
10
0.1
- 1.1
1.5
NEGL
0.2
0.3
a Includes short-term debt maturities, principal payments on medi-
um- and long-term debt, and interest due on all debt maturities but
does not include interbank debt. For Brazil, Chile, and Sudan any
debt rescheduled through 14 September 1983 is not included in the
total debt service figures.
b Despite projected exports of 30,000 b/d, we expect Ivory Coast to
remain a net oil importer in 1983.
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Table B-2
LDC Net Oil Exporters:
Foreign Exchange Impact of a
Major Oil Price Increase
Net Oil
Exporters
Projected Projected
Net Oil Net Oil
Exports, Revenues
1983 at $29/b
Projected
Current
Account
Balance,
Estimated
Debt Due
in 1983 a
(billion US $)
Estimated
Surplus
Productive
Capacity
Additional Oil Revenues
at Full Capacity If Prices
Rise to
(thousand
b/d)
(billion
US $)
1983 (billion
US $)
(thousand
b/d)
37 Per Barrel
(billion US $)
70 Per Barrel
(billion US $)
100 Per Barrel
(billion US $)
Mexico
1,500
15.5
2.5
23.0
400
9.1
30.6
50.2
Argentina
10
0.1
-1.1
3.8
NEGL
NEGL
0.1
0.2
Venezuela b
1,570
15.2
-1.1
22.5
430
9.4
31.3
51.2
Indonesia b
930
9.9
-4.8
7.5
200
5.5
19.3
31.8
Egypt
200
2.1
-3.0
5.9
NEGL
1.0
3.5
6.0
Algeria b
855
9.0
-2.4
6.7
140
4.3
16.2
27.0
Nigeria b
1,090
11.7
-1.9
5.7
880
15.2
39.1
60.9
Peru
60
0.6
-0.6
5.4
NEGL
0.2
0.8
1.5
Malaysia
120
1.5
-3.2
3.4
NEGL
0.4
2.1
3.7
Ecuador b
100
1.0
-1.6
2.6
0.3
1.4
2.4
Zaire
9
0.2
-0.4
1.0
NEGL
NEGL
0.1
0.2
Cameroon
87
0.9
-0.7
0.6
NEGL
0.3
1.3
2.3
a Includes short-term debt maturities, principal payments on medi-
um- and long-term debt, and interest due on all debt maturities but
does not include interbank debt. For Mexico, Argentina, Nigeria,
Peru, and Ecuador any debt rescheduled through 14 September
1983 is not included in the total debt service figures.
b OPEC member.
We believe that many of these LDCs will have
difficulty obtaining loans to finance their higher oil
bills, as bankers will be reluctant to increase LDC
debt exposure and risk another round of moratoriums
and reschedulings. IMF resources could be inade-
quate to meet new financing requests. During past oil
price hikes, the IMF helped defray rising LDC oil
imports through special lending facilities funded by
wealthier OPEC members. Under the current scenar-
io, however, the traditionally surplus Gulf economies
are losing oil revenue, and many are in deficit them-
selves. With relatively low levels of foreign reserves,
oil exporters outside the Gulf might not be so ready to
extend aid to other LDCs.
We expect that many of these oil-importing LDCs
would turn to Washington for funding and leadership
in handling the oil price crisis. Lacking adequate
financing, LDCs that cannot export oil would face
severe recessions and growing unemployment, which
for many governments could stimulate serious politi-
cal and social unrest.
Non-OPEC LDC Oil Exporters
The economies of Mexico, Egypt, Malaysia, Peru, and
Cameroon would benefit from substantially higher oil
revenues. A large oil price windfall would alleviate
current debt servicing problems of Mexico and reduce
prospects for political or social unrest. Mexico's IMF
austerity program is causing bankruptcies, rising un-
employment, and real wage losses and is likely to
result in a 5- to 8-percent decline in real growth this
year, according to our calculations. We also believe
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Table B-3
Persian Gulf Oil Exporters:
Foreign Exchange Impact of a
Closure of the Hormuz Strait
Protected Oil Projected Oil Projected Estimated Official Estimated
Exports, Revenue at Current 1983 Imports Foreign Assets Export
1983 Current Account (billion US $) Yearend, 1982 Capability If
(thousand Prices Balance, (billion US $) Hormuz Strait
b/d) (billion US $) 1983 (billion Closed a
US $) (thousand b/d)
Loss/Gain If Oil
Price Rises to
70 Per 100 Per
Barrel Barrel
(billion US $) (billion US $)
Saudi Arabia
4,415
44.8
-14.2
39.0
153
1,900
3.7 24.5
United Arab
Emirates
Iran
1,945
20.2
4.5
12.0
13
-20.2 -20.2
Iraq
600
6.8
-14.8
16.0
8
-6.8 -6.8
Qatar
290
3.2
2.0
1.5
15
-3.2 -3.2
that Egypt, under current oil market conditions, is
edging toward a financial crisis, and we believe that
tough domestic austerity measures needed to bring
the economy into balance could create political prob-
lems for President Mubarak.
Cameroon and Malaysia would directly benefit from
an oil price rise by boosting oil revenues some $200
million and $400 million, repectively, for each $8 per
barrel increase. Emerging oil exporters Ivory Coast
and Zaire would gain only if the price hike spurred
exploration efforts that could boost net oil exports at a
later date. Financially troubled Peru, with current net
oil exports of about 60,000 b/d, would add about
$200 million for each $8 per barrel oil price rise and
reap $1 billion or more if Persian Gulf supplies were
cut off.
OPEC Members
A disruption of 4 million b/d in Persian Gulf oil
would cause a net reduction in oil supplies to the non-
Communist countries of about 1 million b/d and
would result in a 1984 current account deficit of $20-
35 billion for OPEC as a whole depending on the
import behavior of non-Gulf members. This would be
near the $20-30 billion deficit we currently project for
If oil prices rose $8 per barrel following the net
shortfall to the non-Communist world of 1 million
b/d, we estimate that the current accounts of the
major OPEC debtors-Venezuela, Indonesia, Alge-
ria, Nigeria, and Ecuador-would move from a pro- 25X1
jected deficit of $12 billion at current prices in 1983
to an annual $11 billion surplus. Among the financial-
ly troubled Governments of Ecuador, Nigeria, and
Venezuela, an $8 price rise would help only Nigeria to
forgo debt rescheduling arrangements and IMF loans.
According to our calculations, Venezuela and Ecua-
dor would still require some debt rescheduling or
large new credits in 1984. A larger windfall, resulting
from a complete cutoff of Persian Gulf supplies,
however, would solve their debt problems, allow im- 25X1
port growth, and permit the lifting of unpopular
austerity measures.
1983-84 if oil prices remained stable.
Of the six Persian Gulf producers, Saudi Arabia could
experience financial gains from a price rise following
closure of the Strait of Hormuz, provided its pipeline
to the Red Sea remains open. Iran and Iraq would be
hardest hit by closure of the Strait and the Iraq-
Turkey pipeline. Faced with a loss of income and
Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
 Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
large import needs, Tehran would be forced to
draw down foreign assets-which we estimated at
$13 billion at the end of 1982-and cut imports,
including those needed to fulfill the Khomeini re-
gime's first five-year development plan. With Iraq's
foreign assets declining to $3-4 billion by the end of
this year, closure of the pipeline across Turkey would
make Baghdad even more dependent on foreign finan-
cial assistance
Large foreign asset holdings and modest import needs
would enable Kuwait, UAE, and Qatar to absorb the
loss of oil revenue from the closure of the Strait over
the short term. We estimate that these governments
would have to draw down $15 billion in foreign assets
to maintain current import levels and cover projected
current account deficits over one year. Private capital
outflows, which we believe would be high in this
pessimistic climate, would force even larger asset
drawdowns. Private outflows could also erode any
surplus the Saudi Government may accrue. In our
judgment, an oil supply disruption-if it occurred in
the near future-could have serious adverse conse-
quences for Kuwait's financial sector, which is still
trying to settle numerous bankruptcies and cope with
serious liquidity problems resulting from last year's
stock market crash. Despite large foreign reserves, the
need for economic stringency under these circum-
stances will pose difficult questions for these govern-
ments on domestic spending, asset management, and
foreign aid levels. In the past, control over massive oil
revenues has been a politically and socially stabilizing
factor for these governments, and ruling royal fam-
ilies will have to be careful to minimize criticism that
could undermine the governments' authority.
Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
 Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
large import needs, Tehran would be forced to
draw down foreign assets-which we estimated at
$13 billion at the end of 1982-and cut imports,
including those needed to fulfill the Khomeini re-
gime's first five-year development plan. With Iraq's
foreign assets declining to $3-4 billion by the end of
this year, closure of the pipeline across Turkey would
make Baghdad even more dependent on foreign finan-
cial assistance
Large foreign asset holdings and modest import needs
would enable Kuwait, UAE, and Qatar to absorb the
loss of oil revenue from the closure of the Strait over
the short term. We estimate that these governments
would have to draw down $15 billion in foreign assets
to maintain current import levels and cover projected
current account deficits over one year. Private capital
outflows, which we believe would be high in this
pessimistic climate, would force even larger asset
drawdowns. Private outflows could also erode any
surplus the Saudi Government may accrue. In our
judgment, an oil supply disruption-if it occurred in
the near future-could have serious adverse conse-
quences for Kuwait's financial sector, which is still
trying to settle numerous bankruptcies and cope with
serious liquidity problems resulting from last year's
stock market crash. Despite large foreign reserves, the
need for economic stringency under these circum-
stances will pose difficult questions for these govern-
ments on domestic spending, asset management, and
foreign aid levels. In the past, control over massive oil
revenues has been a politically and socially stabilizing
factor for these governments, and ruling royal fam-
ilies will have to be careful to minimize criticism that
could undermine the governments' authority.
Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
 Top Secret Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9
Top Secret
Approved For Release 2008/08/26: CIA-RDP85M00363R000400740020-9