Iran, Oil and Strait of Hormuz

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Strait of Hormuz, for the uninitiated, is the narrow passage connecting the Persian Gulf to the Arabian Sea, surrounded by countries like Saudi Arabia, Iran, UAE, Iraq and Oman. It is significant for the simple reason that about 17m barrels of oil produced in the Middle East is transported through the Strait. Right now, the strait is in dire straits. Why? For many reasons, most of it centered around oil. How? At about 54 km wide (34 miles) at its narrowest point, the strait can be blocked with ease, and Iran has threatened. Why?

Well, the European Union has placed an embargo on Iranian oil imports, and some sanctions on the central bank. In the US, on Dec 31, President Barack Obama has signed a bill imposing new sanctions on Iran under the National Defence Authorisation Act. This law, apart from targeting the revenue from oil imports, also targets financial institutions from other countries that conduct transaction with Iran's central bank. From March, such institutions would be barred from doing business in the US. The Lawmakers in the US are also planning to blacklist President Mahmoud Ahmadinejad and Iran's supreme leader, Ayatollah Ali Khameini.

When it comes to oil, it's a skidded, slimy conscience. Pleasantries are exchanged and oil is bought from regimes with questionable human rights record. Yet, here we are in almost direct confrontation with Iran. Again, why?

The most important reason for the vigorous avalanche on Iran is the country's-what US perceives as- insatiable pursuit of nuclear weapons. Iran has been repeatedly test-firing missiles in the Gulf with its shore-to-sea Qader cruise missiles to intimidate Western nations. Though Iran maintains that the nuclear developments are for peaceful purpose only, the US isn't convinced. The fact remains that Iran is increasingly bold in confronting the West in general and the US in particular, as Iran believes it has vanquished the US in Iraq by supporting insurgents with weapons, logistics and training, and sees the US' withdrawal from Iraq as a military victory over the US. Furthermore Iran increasingly projects its influence over the US and the western world by radicalizing western Islamic youth. According to the US state department, Iran today is the world's most active state sponsor of terrorism. Iran has also been accused of trying to recruit a hit man from Mexican gangs to assassinate a Saudi diplomat on US soil in October 2011. US believes that Iran's secret services are hard at work to sabotage the US' relations to oil-producing nations by means of terror. Further, Iran is the winner of the Arab spring as it has successfully exported its government structure into other Arab nations. Gradually the revolution that swept the Arab is being hijacked by Iran-supported Islamist hardliners, from Egypt to Syria to Tunisia. Gone is the separation of religion and state, Islamic law is getting imposed everywhere by new fundamentalist government that - guess what - mimic Iran's government structure.

As a result of the sanctions, tensions are running high. In reply, Iran has threatened to block the strait. Iranian Vice President Mohammad Reza Rahimi has said, "If they impose sanctions on Iran's oil exports then even one drop of oil cannot flow from the Strait of Hormuz."

How Iran can strangle the strait?

It's not as easy as putting in steel barriers across the waterway. If blocked, it would be through a series of means - mines, missiles, small boats armed with suicide squads, attack through sub-marines (Iran has miniature submarines which could be launched in shallow waters). In anticipation of such belligerent moves, the aircraft carrier USS Abraham Lincoln has entered the Persian Gulf escorted by six British and French naval forces. It's a cat and mouse game: Should Iran do anything, the 100,000-tonne aircraft carrier wouldn't be a mute spectator. Then, the oil prices would climb up, and everyone would realize how important peace is for the Persian Gulf in a world driven by oil.

To a little history: The need to safeguard the Persian Gulf was felt as early as 1980 when President Jimmy Carter said, "Any attempt by an outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America," adding, "and such an assault will be repelled by any means necessary, including military force." The Carter Doctrine, as it came to be known, was implemented with the creation of Central Command (CENTCOM), to keep tab of any dangers. In 87-88, when Iran threatened oil tankers of Kuwait and Saudi Arabia, the tankers were escorted by U.S. war ships. Later, the same CENTCOM would invade Iraq during the Gulf wars.

In other words, an armed move against Iran isn't difficult. Yet, looking at the ground situation, a show of military might from either side ought to be ruled out, for now. However, some unintentional accidents can change the dynamics, such is the pressure. If the conflict goes all out, Iran has cruise missiles with a range of 11,500km, capable of reaching all of Europe as well as Eastern US including New York. Iran could seize tankers and it could also attack foreign US Navy ships protecting tankers. US ships would be vulnerable to Iran's shore to sea Qader cruise missiles which are stationed at multiple distributed locations, much like Iran's key nuclear sites.

Economic Ramifications

• A blockade in the strait means a halt to 17 million barrels of oil passing through it. Thus, twenty percent of world's oil would stagnate, which would, in turn, send northward the already high oil prices.
• In case of supply disruptions, oil price could increase by $20 to $30 a barrel, the International Monetary Fund has said. A cut in Iranian exports could be exacerbated by below average oil stocks in many countries, the IMF warns. It has to be noted that similar disruption in Libya, not long ago, pushed the oil prices well over $100 a barrel.
• Some analysts estimate the price rise to be over 300 per cent. Apocryphal, maybe. But then, even with half the estimated price rise, the economies which are slowly recovering (the latest US jobs report show positive signs with 243,000 jobs added in January, with unemployment figures at 8.3%, the lowest in three years) would be hurled back to panic mode. (Even otherwise, if you notice, any news from Iran sends the oil investors to a hyper overactive mode. That is, in spite of ground realities).
• According to IEA, Iranian oil 'accounts' for 9 per cent of India's oil consumption, and 6 per cent of China's. Together, these countries suck in almost 34 percent of Iran's oil exports. Of the 2.5 million barrels of oil exported by Iran about 500,000 barrels are exported to Europe, while the rest are imported by China, India, South Korea and Japan. Even if these countries move away from Iran's oil, as US hopes, the demand would easily outstrip the supply.
• As per US calculation, Saudi Arabia could step-in and increase production to offset any demand short falls from Iran. Already, our research shows that Saudi Arabia exaggerates its oil reserve estimates. In addition, as oil-price.net has always maintained, Saudi Arabia (or for that matter OPEC) doesn't have enough oil to shore up the shortfall.

Any alternatives? Let's see. Saudi Arabia can pump in about one million barrels per day through the pipeline running along the Jeddah port on the Red sea. Iraq and the UAE are planning to have new pipelines to counteract the blockade, though that may take time. Even if all the pipelines are realized, we are still talking of two million barrels of oil only. Where to go for the seventeen? Of course, the IEA countries could release some of the oil from the emergency stockpiles. Yet, these may take time, and will have to be replaced-as well.

A word: Don't believe the calculations and assurances from Washington. In the event of a blockade, the price of oil will, in our calculation, increase by over $50. Either that, or we have learnt to shake off our dependency on oil-if that's possible.

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