Iran’s leaders are talking tough about shutting down the straits of Hormuz. This may be a way for them to get the West to negotiate from a weaker position regarding Iran’s nuclear fuel program. Or it may be that Iran thinks there is an attack coming.
If the rhetoric doesn’t calm down, it may not be long before the price of oil moves into the $110- to $125-a-barrel range, energy analysts say. But any movement beyond that will depend on what happens: Does Iran actually try to thwart ships that want to use the strait to transport oil? How would the US Navy or other naval powers react to that?
Oil is highly volatile. In times of excess production or recession it falls sharply. In 2008, it fell from $145 to under $40. But in tight markets, it shoots upward.
At issue is a significant amount of the world’s oil that moves by sea. In 2011, about 17 million barrels of oil per day, or about 35 percent of the world’s seaborne traded oil, moved through the Strait of Hormuz, the US Energy Information Administration estimates. Much of this oil flows to Asia – Japan, China, India, and other emerging economies. But some of the oil flows to Europe, and a relatively small amount – some 1.1 million barrels per day – goes to the United States.
If the Straits are closed for more than a few weeks, worldwide reecession is guaranteed. That’s my view, and I’m sticking to it.
The Iranian threats have taken place as the value of its currency has plunged, after President Obama signed into law a bill that targets the Iranian central bank – part of US efforts to pressure Iran to halt its nuclear program. The Iranian currency, the riyal, sank as Iranians tried to buy dollars.
If the Iranians were to start hostilities, there is no telling where it would lead, says Sarah Emerson, president of Energy Security Analysis Inc. in Wakefield, Mass. “It could escalate into retaliation against the nuclear sites in Iran; Israel could retaliate,” she says. “The worst case is that there is literally military action in the Gulf between the two sides.”
Could Iran actually stop the flow of oil? Yes.
Some parts of the strait are so narrow that the Iranians could sink barges or freighters to block the passage of other vessels. On Monday, Iran claimed to have fired a cruise missile that it said illustrated how it could control the strait.
That would affect China negatively.
The Chinese count on oil moving through the Gulf, Emerson notes. In fact, the Chinese import about 550,000 barrels of oil per day from Iran, which would not be able to export its oil through the strait either if it shut the waterway down.
The following ignores the fact that a 35% reduction in the seaborne oil supply would affect the whole world.
“When it comes to this kind of action by the Iranians, who are they hurting?” says Emerson. “They would be hurting their main customers, the Asians and other developing nations. They would not be poking the US in the eye.”
That’s because the bulk of US imports, which are about 9 million barrels of oil per day, come from places such as Canada, Mexico, Brazil, Africa, and Europe. Also, with a stockpile of more than 700 million barrels of oil in the Strategic Petroleum Reserve, the US could draw down from it over 466 days at a rate of 1.5 million barrels of oil per day.
This is economic nonsense. It assumes that the worldwide recession would not affect the USA.
If Iran does what it says, the U.S. Navy had better be able to do what it says: uncork the Straits, fast.