Iran Rejects US Warning Against Closing Strait of Hormuz
Comment of the Day

December 29 2011

Commentary by David Fuller

Iran Rejects US Warning Against Closing Strait of Hormuz

Here is the opening from this latest news report by Voice of America:
Iran has rejected a U.S. warning against blocking oil shipments through the strategic Strait of Hormuz, as a war of words between the two countries continues.

Iran's semi-official Fars news agency Thursday quoted Revolutionary Guard commander Hossein Salami as saying Iran can carry out its own "defensive strategies."

Tehran threatened earlier this week to block the entrance to the Persian Gulf if the West imposes sanctions targeting Iran's oil exports. Such a move by the West would add to several rounds of sanctions already imposed on Iran over its controversial nuclear program.

More than one-third of the world's tanker-borne oil supply passes through the Strait of Hormuz. A closure could temporarily cut off some oil supplies and impact the price of oil worldwide.

The Pentagon has said interfering with the passage of vessels through the strait will not be tolerated.

A recent United Nations report said Iran appears to be secretly working on designing a nuclear weapon - something Tehran denies. European Union ministers have said that a decision on further economic sanctions, including a boycott of Iranian oil, will be made in the coming weeks. The vast majority of Iran's foreign revenue comes from oil exports.

Separately, a spokeswoman for the Bahrain-based U.S. Fifth Fleet told VOA in an email that the flow of goods through the strait is "vital to regional and global prosperity." Lieutenant Rebecca Rebarich said the U.S. Navy is ready to "counter malevolent actions" to ensure navigation freedom.

David Fuller's view This story has been the main factor behind the firmer tone for crude oil (WTI weekly & daily) (Brent weekly & daily) for the two weeks of trading up until yesterday's broader market sell-off.

This is probably no more than a dangerous game of bluff by Iran - at least one hopes so, but the regime may feel that it has to do something beyond rhetoric, if only to save face. For a number of years they have occasionally used small, high-speed patrol boats to harass or even kidnap people on other light crafts in the Strait of Hormuz.

To actually block the Strait, the sinking of a least one large tanker would presumably be required. Even this might not achieve the intended result because the narrow sea lanes for tankers heading in and out of the Strait are two miles wide. Iran could also try to mine the sea lanes, which it last did in 1988, nearly sinking a US tanker and prompting President Reagan to destroy two Iranian oil platforms and a warship in Operation Praying Mantis (see this report from CNN for details).

The US Navy has a major presence in the Strait of Hormuz region and should be more than capable of dealing with any threat from Iran. That country's theocratic regime will know this but it may have a longer-term political objective, in addition to intimidating European governments.

Iran's regime might rightly conclude that it has more to lose with a Republican victory in next year's US Presidential Election. Among their concerns would be even closer ties between the US government and Israel; an even tougher stance against Iran's nuclear weapon development programme and most of all, a considerably stronger push by the Republicans to develop the USA's own oil reserves, from Alaska to the Gulf of Mexico, not to mention shale oil deposits.

A belligerent Iran between now and November 2012, perhaps necessitating a show of force by the incumbent US administration to protect traffic in the Strait of Hormuz, could provide a timely electoral boost for President Obama, as we also saw with the successful mission against Osama bin Laden.

Meanwhile, global supply and demand for crude oil, while always tight, would suggest somewhat lower prices while the global economy remains soft. However, supply is usually the key variable for commodities, including crude oil, which is produced in some of the world's less stable regions.

Even a short-lived pause in the flow of oil from the Strait of Hormuz would be a disaster for the global economy, resulting in a recession-inducing price spike. While this risk should be far less likely than the Iranian government would like us to think, there are other production hot spots.

Political stability in Iraq is not a given, especially now that US troops are no longer there in significant numbers. Iran may be emboldened to increase its covert efforts in Iraq. It is unlikely that we have seen the end of 'Arab Spring' uprisings. Hopefully, these are in the long-term best interests of the countries involved, but they can result in war ravaged chaos, as we saw in Libya earlier this year. Religious tensions between Muslims and the minority of Christians in Nigeria have flared up recently. Lastly, successful sanctions against Iran could reduce its supply of oil to the world.

The oil price will remain a potential game changer in 2012. With luck in the form of no major supply disruptions, the global economy should be cushioned by abundant and not too expensive oil supplies. However, another surge in the price of crude oil, such as we saw in 2008 and to a lesser extent in 2011, would result in even slower GDP growth and deeper recessions in weaker economies.

In the west, the USA should continue to outperform because of its technology, its greater number of Autonomies which span the globe, and its potential for energy independence in the next decade.

Here is a recent article on proposed new US sanctions on Iran, published by the NYT and IHT: Iran Threatens to Block Oil Shipments as US Prepares Sanctions.

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