Financial Technology

Financial Technology

December 28, 2011

US warns Iran against closing key oil passage

TEHRAN, Iran (AP) — 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 that Tehran was close

"Iran has comprehensive control over the strategic waterway," Adm. Habibollah Sayyari told state–run Press TV, as the country was in the midst of a 10–day military drill near the strategic waterway.

The comments drew a quick response from the U.S.

"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," Pentagon press secretary George Little said. "Interference with the transit or passage of vessels through the Strait of Hormuz will not be tolerated."

Separately, Bahrain–based U.S. Navy 5th Fleet spokeswoman said the Navy is "always ready to counter malevolent actions to ensure freedom of navigation."

Iran's threat to seal off the Gulf, surrounded by oil–rich Gulf states, underlines the depth of worry over the prospect that the Obama administration will go ahead with sanctions over its nuclear program that would severely hit its biggest revenue earner, oil. The sanctions themselves have raised worries that removing Iran's crude from the market will lead to a spike in oil prices.

Gulf Arab nations appeared ready to at least ease market tensions. A senior Saudi Arabian oil official told the AP that Gulf Arab nations are ready to step in to offset any potential loss of exports from Iran, which is the world's fourth largest oil producer. The official spoke on condition of anonymity because he was not authorized to comment on the issue.

Saudi Arabia, which has been producing about 10 million barrels per day, has an overall production capacity of over 12 million barrels per day and is widely seen as the only OPEC member with sufficient spare capacity to offset major shortages. But Iran — the world's fourth largest producer — pumps about 4 million barrels per day, meaning that other Gulf states would also have to up their output to offset the decline.

What remains unclear is what routes the Gulf nations could take to bring that production to market if Iran goes through with its threats.

About 15 million barrels per day pass through the Hormuz Strait, according to the U.S. Energy Information Administration. There are some pipelines that could be tapped, but Gulf oil leaders, who met in Cairo on Dec. 24, declined to say whether they had discussed alternate routes or what they may be.

The Saudi comment, however, appeared to allay some concerns. The U.S. benchmark crude futures contract fell 77 cents in early morning trade on the New York Mercantile Exchange, but still hovered above $100 per barrel.

U.S. State Department spokesman Mark Toner played down the Iranian threats as "rhetoric," saying, "We've seen these kinds of comments before."

While many analysts believe that Iran's warnings are little more than posturing, they still highlight both the delicate nature of the oil market, which moves as much on rhetoric as supply and demand fundamentals.

Iran relies on crude sales for about 80 percent of its of its public revenues, and sanctions or an even pre–emptive measure by Tehran to withhold its crude from the market would already batter its flailing economy.

IHS (News - Alert) Global Insight analyst Richard Cochrane said in a report issued Wednesday that markets are "jittery over the possibility" of Iran's blockading the strait. But, he said, "such action would also damage Iran's economy, and risk retaliation from the U.S. and allies that could further escalate instability in the region."

"Accordingly, it is not likely to be a decision that the Iranian leadership will take lightly," he said.

Earlier sanctions that have targeted the oil and financial sector have added new pressures to the country's already struggling economy. Government cuts in subsidies on key goods like food and energy have angered Iranians, stoking inflation while the country's currency is steadily depreciating.

The impetus behind the subsidies cut plan pushed through parliament by Iranian President Mahmoud Ahmadinejad was to reduce budget costs and would pass money directly to the poor to pay for their needs. But critics have pointed to it as another in a series of bad policy moves by the hardline president.

So far, Western nations have been unable to agree on sanctions targeting oil exports, even as they argue that Iran is trying to develop a nuclear weapon. Tehran maintains its nuclear program — already the subject of several rounds of sanctions — is purely peaceful.

The U.S. Congress has passed a bill banning dealings with the Iran Central Bank, a move that would heavily hurt Iran's ability to export crude. The bill could impose penalties on foreign firms that do business with Iran's central bank. European and Asian nations use the bank for transactions to import Iranian oil.

President Barack Obama has said he will sign the bill despite his misgivings. China and Russia have opposed such measures. A likely result of the sanctions would be that oil prices would at least temporarily spike to levels that could weigh heavily on the world economy.

Closing the Strait of Hormuz would hit even harder. Energy consultant and trader The Schork Group estimated in a report that crude would jump to above $140 per barrel. Conservatives in Iran claim global oil prices will jump to $250 a barrel should the waterway be closed.

By closing the strait, Iran may aim to send the message that its pain from sanctions will also be felt by others. But it has equally compelling reasons not to try.

The move would put the country's hardline regime straight in the cross–hairs of the world, including those nations that have so far been relative allies. Much of Iran's crude goes to Europe and to Asia.

"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," said analyst Olivier Jakob of Petromatrix in Switzerland.

Iran has adopted an aggressive military posture in recent months in response to increasing threats from the U.S. and Israel of possible military action to stop Iran's nuclear program.

The Iranian navy's exercises, which began on Saturday, involve submarines, missile drills, torpedoes and drones. A senior Iranian commander said Wednesday that the country's navy is also planning to test advanced missiles and "smart" torpedoes during the maneuvers.

The war games cover a 1,250–mile (2,000–kilometer) stretch of sea off the Strait of Hormuz, northern parts of the Indian Ocean and into the Gulf of Aden near the entrance to the Red Sea as a show of strength and could bring Iranian ships into proximity with U.S. Navy vessels in the area.

Moderate news website,, says the war games are intended to send a message to the West that Iran is capable of sealing off the waterway.

"The war games ... are a warning to the West that should oil and central bank sanctions be stepped up, (Iran) is able to cut the lifeblood of the West and Arabs," it said, adding that the West "should regard the maneuvers as a direct message."


El–Tablawy reported from Cairo. Associated Press (News - Alert) writers Adam Schreck in Dubai and Abdullah Shihri in Riyadh, Saudi Arabia, contributed.


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