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What's worse for the price of oil — a belligerent Iran or a resurgent COVID?

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How much bad news does it take to shift the price of oil? And what sort of news? The price fell in early trading in Asia on Monday, but the movement wasn't because of concern about belligerence blamed on Iran near the strategic Strait of Hormuz at the end of last week; that would have prompted a rise. Instead, the cause was renewed COVID-related concern about the health of the Chinese economy. 

In times past, the deaths on July 29 of two crew members of the Mercer Street, an oil product tanker and part of the business empire of an Israeli billionaire, would have caused considerable consternation in the markets. The men were killed when an Iranian unmanned aerial vehicle (UAV) slammed into the ship's superstructure in the Gulf of Oman more than 300 miles from the Iranian coast. Iranian officials have denied any connection to the incident, a claim that convinces nobody. We wait to hear what they will say when bits of debris, likely stamped with "Made in Iran," are recovered from the wreckage, as has happened in the past. The ship, under its own steam but with a U.S. Navy escort, was last reported heading to the United Arab Emirates (UAE) port of Fujairah. 

While energy markets are unruffled, the diplomatic world is working itself up into a frenzy of words, although not yet action. Secretary of State Antony BlinkenAntony BlinkenAides try to keep Biden away from unscripted events or long interviews, book claims Overnight Defense & National Security — The Pentagon's deadly mistake France pulls ambassadors to US, Australia in protest of submarine deal MORE said Sunday that Washington is "confident that Iran conducted the attack," adding that such actions "threaten freedom of navigation though this crucial waterway, international shipping and commerce, and the lives of those on the vessels themselves." 

His British equivalent, Dominic Raab, was even faster to react — one of the dead being a British security guard. The attack, he said, "was deliberate, targeted, and a clear violation of international law." He went on: "Iran must end such attacks. …The U.K. is working with our international partners on a concerted response to this unacceptable attack." 

Unsurprisingly, Israel had been the first to demand an international response. Even Romania, the country of the other crew member killed, has weighed in.

An awkward fact for diplomatic action is that the incident appears to have been part of an escalating "shadow war" being waged between Iran and Israel. There have been mysterious explosions damaging Iranian ships off the coast of Syria and in the Red Sea in the past year or so as Israel tries to undermine Iran's allies, a subset of its determination not to allow Tehran to develop a nuclear weapon. Now Iran has begun hitting back. The U.S., Britain and other countries want to tackle the problem of Iran's nuclear program and destabilizing influence via diplomacy. Israel either doesn't think there is time for that or regards a multifaceted approach as justified and/or necessary.

This morning in London the Iranian ambassador was summoned to the grand imperial hallways of the British Foreign Office for a dressing down, although the impact this may have when he reports back to Tehran is probably minimal. Apart from persistent revolutionary insolence towards a once-dominant influence, Tehran is in transition this week: President Hassan Rouhani, notionally a relative moderate, is being replaced by Ibrahim Raisi, a hardliner much closer aligned to Supreme Leader Ayatollah Ali Khamenei.

More concerning, perhaps, is that the attack may cause a recalculation of U.S. and British military options against Iran. If a UAV or something similar can hit an oil tanker, it may also be able to hit an aircraft carrier. Just a week ago the new British carrier, HMS Queen Elizabeth II, passed through the same waters on its way to the east and to show the flag in waters close to China. The carrier USS Ronald Reagan and its strike group are still in the area, although focusing on coping with Taliban advances in Afghanistan; the carrier may be taking the option of hiding itself in the open ocean, but that makes it less effective.

The potential vulnerability also extends to the downtime of both navies. The area where the attack took place is close to the Omani port of Duqm, where the U.S. and U.K. have port facilities capable of handling aircraft carriers and nuclear submarines. Oman also may be a sensitive host; after the latest attack, it pointedly announced that the incident had not taken place in its territorial waters.

Diplomatically, Washington and London may find themselves limited by the reluctance of their Gulf Arab allies to confront Iran. The Biden administration's coolness towards the use of force already has prompted countries such as Saudi Arabia and the UAE to work on diplomatic channels with Tehran. Their balance between fear of Iran, their new ties with Israel, and dealing with their larger neighbor across the waters of the Gulf will, in all likelihood, be a fudge. 

Iran's denial of involvement will incentivize such an outcome. It is also an acknowledgement that Tehran needs to export oil as much as its neighbors. The oil market's eye will still watch the Gulf — but its principal concern is COVID's impact on the world economy.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.

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