US-Iran tensions spike over threat to close oil passage, but oil prices lower

Updated On: Dec 29, 2011

Iran has warned it would close the Strait of Hormuz if the US and its allies slapped it with more sanctions over its nuclear programme, which they claim is used for developing nuclear weapons, an accusation Iran denies. In response, the US Navy warned Iran that they will not allow any such attempt.

Iran threatens to close Strait of Hormuz

Western countries have recently enacted new sanctions against Iran after a UN report claimed that the country had conducted tests towards the "development of a nuclear device", with Iran responding in anger.

On Tuesday, Vice-President Mohammad Reza Rahimi warned that "not a drop of oil will pass through the Strait of Hormuz" if sanctions are broadened. Iran's navy chief Admiral Habibollah Sayari was quoted as saying that shutting down the strait would be "easier than drinking a glass of water".

About 15 million barrels of oil per day goes through the Strait of Hormuz, a narrow maritime route that connects the Persian Gulf to the Gulf of Oman. An interruption of that flow would cause oil price to skyrocket in an already weak global economy.

Iran's navy has been staging naval wargames in international waters to the east of the strait. Admiral Sayari said the exercises aimed to show Iran’s Gulf neighbours its military power.

US Navy warns Iran; analysts not worried

The US Navy has warned that they will prevent any attempt by Iran to block the Strait. The US Navy 5th Fleet spokeswoman Lt. Rebecca Rebarich said the Navy is “always ready to counter malevolent actions to ensure freedom of navigation.”

Pentagon press secretary George Little also said, “This is not just an important issue for security and stability in the region, but is an economic lifeline for countries in the Gulf, to include Iran… Interference with the transit or passage of vessels through the Strait of Hormuz will not be tolerated.”

However, others do not appear worried about Iran closing the Strait. State Department spokesman Mark Toner sounded doubtful about the threat, saying it was "more rhetoric from the Iranians.... I'm saying at this point it's pure speculation."

Other analysts say Iran is unlikely to block the Strait as it would deal a major blow to the Iranian economy due to import and export disruptions. The Iranian leadership, under pressure from talk of sanctions and a weak economy, issue such belligerent rhetoric is a way to keep up the appearance of power.

Paul Sullivan, an expert in energy and the Middle East at Georgetown University in Washington, was quoted as saying, "It's an empty threat that would backfire. It would devastate the economy of Iran even if they tried it for a very brief period. They would never do it."

Alireza Nader, an Iran specialist at Rand Corporation, said the Iranian rhetoric was intended to send a message to Western countries against proceeding with the additional economic sanctions they have been preparing. However, he warned that even though neither the US nor Iran was keen on armed conflict, "tensions are so high that there's room for miscalculation."

IHS Global Insight analyst Richard Cochrane said in a report that Iran’s action would “damage Iran’s economy, and risk retaliation from the US and allies that could further escalate instability in the region.” He concluded, “Accordingly, it is not likely to be a decision that the Iranian leadership will take lightly.”

Analyst Olivier Jakob of Petromatrix in Switzerland chimed in, “Shutting down the strait ... is the last bullet that Iran has and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia.”

No major impact on oil markets – yet

In spite of increased tensions, Brent crude on Wednesday fell $1.71 to end at $107.56 a barrel in London, while in New York, benchmark crude fell $1.98, or about 2 per cent, to finish at $99.36 a barrel.

Analysts said it would take actions, rather than just rhetoric, to significantly impact oil prices as tension between Iran and the Western allies had already been priced into the market.

Amid worries that latest tensions would impact oil markets, Gulf Arab nations appeared ready to ease those concerns. A senior Saudi Arabian oil official was quoted by the Associated Press that Gulf Arab countries are ready to supply additional oil should Iran attempt to close the Straits of Hormuz. The official didn't specify other routes that could be used to carry oil, although they would likely be longer and more expensive.

However, a London-based analyst cautioned that an eventual Iranian blockage of the Straits may affect oil supply. “If sanctions interrupt Iranian exports, then other Gulf countries could make up for them, but if Iran blocks the Strait, all Gulf oil would be blocked,” Manaar Energy analyst Robin Mills said. “The United Arab Emirates has a pipeline to Fujairah that could handle all of its exports, and Saudi Arabia could use its pipeline to the Red Sea for some of its oil, but the rest would be blocked.”

Oil prices were also reportedly pushed downward by fears over Europe and concerns about future demand for oil as the region's economy declines.

Report: US warns Iran over threat to block oil route (BBC, 28 Dec 2011)

Report: U.S. Warns Tehran on Strait (Wall Street Journal, 29 Dec 2011)

Report: Iran threats to close key oil passage over US sanctions raise tensions over oil prices (Washington Post, 28 Dec 2011)

Report: Iran naval chief says closing gulf to oil traffic would be easy (LA Times, 28 Dec 2011)

Report: Oil price falls as Saudis trump Iran threat (Associated Press, 29 Dec 2011)

Report: Iran Strait Block Would Shut In Gulf Oil Exports, Analyst Says (Bloomberg, 28 Dec 2011)

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