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Iranian naval ships take part in a naval parade on the last day of the Velayat-90 war game in the Sea of Oman near the Strait of Hormuz in southern Iran Jan. 3, 2012. (REUTERS)
Iranian naval ships take part in a naval parade on the last day of the Velayat-90 war game in the Sea of Oman near the Strait of Hormuz in southern Iran Jan. 3, 2012. (REUTERS)

Strait of Hormuz

Iran, U.S. play cat and mouse with the world's oil Add to ...

The United States has got a tiger by the tail as it ratchets up the pressure on Iran over its nuclear program while attempting to avoid an oil-price shock that would seriously damage the fragile global economy.

Iran has responded to the U.S. move to tighten sanctions by threatening to close the strategically crucial Strait of Hormuz, a key gateway from the Persian Gulf through which much of the world’s oil trade passes.

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The rising political tensions roiled the global crude markets on Tuesday, as the benchmark North American oil price jumped more than $4 (U.S.) a barrel crude to $102.96. Traders are betting that prices would spike dramatically – perhaps as high as $150 (U.S.) a barrel – if the standoff escalates into an actual military conflict.

Higher crude costs would reduce household spending on others goods and services; drive up other prices, especially food, and batter the confidence of long-suffering consumers.

U.S. President Barack Obama signed into law on New Year’s Eve a series of new sanctions that would prohibit any foreign bank or institution that continues to do transactions with the Iranian central bank from having access to the U.S. financial system. The sanctions – which Mr. Obama can apply selectively – hit directly at Iran’s weakened financial state and its ability to sell oil on the international market.

The European Union is scheduled to debate tougher sanctions later this month, including similar financial measures to those taken by the United States, and an embargo on importing Iranian oil.

In response, Iranian military officials have warned that the country will close the Straits of Hormuz, and have backed up that threat with a series of missile tests and naval manoeuvres that ended Tuesday.

While the Obama administration is attempting to squeeze the Iranian regime into backing off its nuclear-development program, U.S. officials sought to play down the possibility of military conflict in the Persian Gulf.

“No one in this government seeks confrontation over the Strait of Hormuz,” Pentagon spokesman George Little said Tuesday. “It’s important to lower the temperature.”

17 million barrels a day

The Strait of Hormuz – a mere 34 kilometres wide at its narrowest spot – is the world’s most critical choke point for crude-oil trade.

Every day, some 17 million barrels of crude is expected through the waterway from Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran itself. That represents 35 per cent of the world’s seaborne crude export, and almost 20 per cent of total oil traded.

In recent days, Iran has test-fired both medium- and long-range missiles in the area, and its senior military officials have been blunt about the country’s determination to respond to the West’s financial stranglehold with its own economically targeted attack – a closing of the oil shipping route.

Alternate routes do exist to get crude out of the region – including underutilized pipelines through Iraq, Saudi Arabia and the United Arab Emirates.

While many analysts doubt the ability of Iran to close the straits given the dominating presence of the U.S. Navy, Tehran’s threat is not being dismissed out of hand.

“A ship on the ocean is an obvious target,” said Michael Lynch, president of Strategic Energy & Economic Research. “Even the Iranians can hit one.”

It’s likely not in Iran’s interest to close the Persian Gulf to oil exports since it would be hurting customers such as China and India and depriving itself of export revenues, said Bhushan Bahree, Washington-based Middle East expert with IHS CERA consultancy.

“But they can certainly make everybody think this is a dangerous situation,” Mr. Bahree said. “They could harass shipping; make it more expensive to insure; discourage ship owners from sending ships in and continuously keep the level of tension up.”

$100-billion

Political tensions in the Middle East actually help oil exporters, and Iran’s sabre-rattling is driving up the price of its chief export, crude oil.

Mr. Bahree has calculated the Persian Gulf state saw its oil revenues soar to $100-billion (U.S.) in 2011, up more than 30 per cent from 2010 thanks to elevated crude prices.

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