Oil price would skyrocket if Iran closed the Strait of Hormuz

The New York Times reports: If Iran were to follow through with its threat to blockade the Strait of Hormuz, a vital transit route for almost one-fifth of the oil traded globally, the impact would be immediate: Energy analysts say the price of oil would start to soar and could rise 50 percent or more within days.

An Iranian blockade by means of mining, airstrikes or sabotage is logistically well within Tehran’s military capabilities. But despite rising tensions with the West, including a tentative ban on European imports of Iranian oil announced Wednesday, Iran is unlikely to take such hostile action, according to most Middle East political experts.

United States officials say the Navy’s Fifth Fleet, based in nearby Bahrain, stands ready to defend the shipping route and, if necessary, retaliate militarily against Iran.

Iran’s own shaky economy relies on exporting at least two million barrels of oil a day through the strait, which is the only sea route from the Persian Gulf and “the world’s most important oil choke point,” according to Energy Department analysts.

A blockade would also punish China, Iran’s most important oil customer and a major recipient of Persian Gulf oil. China has invested heavily in Iranian oil fields and has opposed Western efforts to sanction Iran over its nuclear program.

Despite such deterrents to armed confrontation, oil and foreign policy analysts say a miscalculation is possible that could cause an overreaction from one side or the other.

“I fear we may be blundering toward a crisis nobody wants,” said Helima Croft, senior geopolitical strategist at Barclays Capital. “There is a peril of engaging in brinksmanship from all sides.”

Reuters reports: Some sanctions experts argue that, paradoxically, growing evidence of the restrictions’ impact may complicate the diplomacy that will eventually be needed to resolve the West’s long-running standoff with Tehran.

Following years of patient statecraft, the tightened curbs represent a step-change in efforts by Western governments to hold back activities they suspect are aimed at building an atomic bomb. Iran insists its work is strictly non-military.

In large part, the curbs’ new clout stems from a U.S. measure signed into law on December 31 in effect targeting Iran’s central bank, the OPEC member state’s payment conduit for its lifeline oil exports.

On Wednesday European Union diplomats said European governments had agreed in principle to ban imports of Iranian oil, further raising pressure on the world’s Number 5 crude exporter.

The resort to heavier coercion must be balanced by a corresponding increase in diplomatic attention so as to avert deeper Iranian inflexibility and exploit any new openings the sanctions might deliver, some sanctions skeptics say.

Yet to some, it’s not clear whether the West will be as adroit in engaging with Iran as it has been in sanctioning it.

“The West needs a flexible and imaginative approach to enable the Iranians eventually to climb down,” Richard Dalton, Britain’s ambassador to Tehran from 2002 to 2006, told Reuters.

Dalton fears Washington could stumble into a war with Iran through mischance or miscalculation by either side, as tension rises.

George Lopez, a political scientist at the University of Notre Dame, Indiana, who has long monitored sanctions policy against Iran, North Korea and Iraq, said Obama’s targeting of the central bank was a turning point in which Tehran in effect was now being treated as “an outcast regime.”

“The U.S. is moving from essentially non-proliferation sanctions to condemnation of the system,” he told Reuters.

Lopez added the onus was going to be on the Obama administration to reemphasize the possibility of the diplomatic track and the goal of denuclearization rather than regime change.

Michael Cembalest, the global head of investment strategy for J.P. Morgan Asset Management, in an appendix to his 2012 Outlook titled “Learning to live with a nuclear Iran,” points out:

After the NATO intervention in Libya, Ayatollah Khamenei gave a speech saying that Ghaddafi’s mistake was giving up his nuclear program, as it made him vulnerable to outside intervention. This reduces the chances of a deal whereby Iran agrees to meaningful compromises.

Why indeed would Tehran trust an American president who came into office promising diplomatic engagement yet who now appears willing to pander to those in Washington who seek regime change? The only thing that Washington and Tehran now share is mutual distrust. In the absence of diplomacy that mistrust will only deepen and as it does so, create new hazards.

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