Oil Price Would Skyrocket if Iran Closed the Strait of Hormuz

Clifford Klauss – New York Times January 4, 2011

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.”

Various Iranian officials in recent weeks have said they would blockade the strait, which is only 21 miles wide at its narrowest point, if the United States and Europe imposed a tight oil embargo on their country in an effort to thwart its development of nuclear weapons.

That did not stop President Obama from signing legislation last weekend imposing sanctions against Iran’s Central Bank intended to make it more difficult for the country to sell its oil, nor did it dissuade the European Union from moving toward a ban on Iranian oil imports.

Energy analysts say even a partial blockage of the Strait of Hormuz could raise the world price of oil within days by $50 a barrel or more, and that would quickly push the price of a gallon of regular gasoline to well over $4 a gallon. “You would get an international reaction that would not only be high, but irrationally high,” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation.

Just the threat of such a development has helped keep oil prices above $100 a barrel in recent weeks despite a return of Libyan oil to world markets, worries of a European economic downturn and weakening American gasoline demand. Oil prices rose slightly on Wednesday as the political tensions intensified.

American officials have warned Iran against violating international laws that protect commercial shipping in international waters, adding that the Navy would guarantee free sea traffic.

“If the Iranians chose to use their modest navy and antiship missiles to attack allied forces, they would see a probable swift devastation of their naval capability,” said David L. Goldwyn, former State Department coordinator for international energy affairs. “We would take out their frigates.”

More than 85 percent of the oil and most of the natural gas that flows through the strait goes to China, Japan, India, South Korea and other Asian nations. But a blockade would have a ripple effect on global oil prices.

Since Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates all rely on the strait to ship their oil and natural gas exports, a blockade might undermine some of those governments in an already unstable region.

Analysts say that a crisis over the Strait of Hormuz would most likely bring China and the United States into something of an alliance to restore shipments, although Mr. Goldwyn said China would more likely resort to private diplomacy instead of military force.

Europe and the United States would probably feel the least direct impact because they have strategic oil reserves and could get some Persian Gulf oil through Red Sea pipelines. Saudi Arabia has pipelines that could transport about five million barrels out of the region, while Iraq and the United Arab Emirates also have pipelines with large capacities.

But transportation costs would be higher if the strait were blocked, and several million barrels of oil exports would remain stranded, sending energy prices soaring on global markets.

“To close the Strait of Hormuz would be an act of war against the whole world,” said Sadad Ibrahim Al-Husseini, former head of exploration and development at Saudi Aramco. “You just can’t play with the global economy and assume that nobody is going to react.”

The Iranians have struck in the strait before. In the 1980s, Iran attacked Kuwaiti tankers carrying Iraqi oil, and the Reagan administration reflagged Kuwaiti ships under American flags and escorted them with American warships. Iran backed down, partially, but continued to plant mines.

In 1988, an American frigate hit an Iranian mine and nearly sank. United States warships retaliated by destroying some Iranian oil platforms. Attacks and counterattacks continued for months, and a missile from an American warship accidentally shot down an Iranian passenger aircraft, killing 290 passengers.

Energy experts say a crisis in the strait would most likely unfold gradually, with Iran using its threats as a way to increase oil prices and shipping costs for the West as retaliation against the tightening of sanctions. So far, energy experts say, insurance companies have not raised prices for covering tankers, but shipping companies are already preparing to pay bonuses for crews facing more hazardous duties.

“My guess is this is a lot of threats,” said Michael A. Levi, an energy expert at the Council on Foreign Relations, “but there is no certainty in this kind of situation.”

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