Economic forecasts as well as year-end “what to look for” lists cannot possibly take into account unexpected scenarios that could lead to economic catastrophe or international incidents. The death of Kim Jong-il is conceivably one of these unpredictable events on the foreign policy side. The Iranian threat to close off the Strait of Hormuz would have implications across the board.
The U.S. warned Iran on Wednesday it will not tolerate any disruption of traffic through the Strait of Hormuz after Iran threatened to choke off the vital Persian Gulf oil transport route if Washington imposes sanctions targeting its crude exports.
The increasingly heated exchange raises new tensions in a standoff that has the potential to spark military reprisals and propel oil prices to levels that could batter a global economy already grappling with a European debt crisis.
Iran’s navy chief boasted Wednesday that it would be “very easy” for his country’s forces to close the strategic Strait of Hormuz, the passage at the mouth of the Persian Gulf through which a sixth of the world’s oil passes daily. It was the second such threat in two days following a warning by Iran’s vice president.
It’s not entirely clear how easy it would be for Iran to shut down the Strait. But 15 million barrels of oil pass through it every day.
This, incidentally, is the entire acknowledged purpose of the US military presence in the Middle East; to ensure safe shipping for hydrocarbon tankers. If the real cost of oil took into account all the military infrastructure in place designed to secure its passage, the price of a gallon of gas would approach $10. The Navy’s 5th fleet in Bahrain quickly put out a statement saying they would “counter malevolent actions to ensure freedom of navigation.” That’s their entire purpose.
The Saudis quickly said that they would offset any loss of exports from Iran, but they simply don’t have the production capacity to cover oil blocked at the Strait. In fact, they could not even cover the 4 million barrels a day pumped by Iran, if their product falls under an embargo or if Iran pre-emptively holds back its oil shipments. And the point is not the production capacity but the ability to ship; alternate routes for Gulf oil are incredibly shaky. Prices would spike to at least $140 a barrel in the event of a disruption in the Strait.
If Iran goes through with their threat, I fail to see how military operations would be avoided. This is a fight that many have been spoiling for, and Iran’s aggressive move would give them a pretext they have so fervently desired.
Maybe this is a case of speaking loudly and carrying a small stick. I certainly hope so. Because of the consequences, Iran would have to have some hesitation over this move, and other Gulf states would fall on the side of the international community in any dispute (it would be their meal ticket getting blocked, after all), as well as China and Russia, the beneficiaries of much of Iran’s oil.