Oil prices soar, then fall, as Iran threatens its western adversaries that it can control the jugular vein for global oil supplies.
Closing Strait of Hormuz is 'easier than drinking a glass of water'
Iran warned its western adversaries yesterday that closing the Strait of Hormuz, the jugular vein for global oil supplies, would be easier than "drinking a glass of water".
Blocking the narrow waterway at the mouth of the Gulf could trigger a military conflict with the US and Britain, which have warships in the area, and send oil prices soaring, at least in the short term.
A spokeswoman for the US navy's Fifth Fleet, based in Bahrain, warned any disruption of traffic flowing though the Strait of Hormuz was unacceptable.
"Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations. Any disruption will not be tolerated," said Lieutenant Rebecca Rebarich.
Iran's first vice president, Mohammad Reza Rahimi, vowed on Tuesday that "not one drop of oil" would pass through the Strait if the West imposed sanctions on Tehran's oil exports because of its nuclear programme.
"The world will only drop their plots when we put them back in their place," he said.
After he spoke, the price of oil rose above $100 (Dh367.3) a barrel, but fell again after Lt Rebarich's statement and a pledge by a senior Saudi oil official that Gulf Arab nations were ready to offset any loss of Iranian crude.
After boasting yesterday: "Shutting the strait for Iran's armed forces is … easier than drinking a glass of water," Iran's navy chief Admiral Habibollah Sayari said: "Today, we don't need [to shut] the strait because … it is completely under the control of the Islamic Republic of Iran".
Barack Obama, the US president, is preparing to sign legislation that could substantially reduce Iran's oil revenue and Britain, France and Germany are pushing for an embargo on Iranian oil exports to Europe.
Washington plans to penalise foreign corporations that do business with Iran's central bank, which collects payments for most of Iran's energy exports. This would make it hard for those dealing with Iran's central bank to carry out financial transactions with the US.
The European Union insisted yesterday that despite Iranian threats it would press ahead with plans to impose new sanctions by January 30, when EU foreign ministers next meet in Brussels.
And Gulf nations are prepared to offset any potential loss of Iranian oil in the world market, senior Saudi oil officials said.
The threats from Tehran coincided with military muscle-flexing in international waters east of the Strait of Hormuz, where Iran began 10 days of navy exercises on Saturday.
Iran's state-run Press TV reported yesterday that "new classes of domestically built torpedoes" had been test-fired in the war games, which also simulated the destruction of an enemy submarine and the downing of a spy drone over the Sea of Oman.
About a third of the world's tanker-borne oil passes through the Strait of Hormuz. It is a strategic chokepoint that links the Gulf, and its petroleum-exporting states of the UAE, Saudi Arabia, Bahrain, Qatar and Kuwait, with the Gulf of Oman and the Indian Ocean beyond.
The US and Britain maintain a navy presence in the Gulf in large part to ensure that passage for oil remains free.
The US State Department said it saw an "element of bluster" in the Iranian threats that analysts said showed Tehran, despite its bravado, was rattled by the possibility of an oil embargo.
Trita Parsi, president of the National Iranian American Council, agreed, but added: "If tensions escalate and Iran's back is pushed to the wall, it is not inconceivable that Tehran will pursue this option."
For the moment, however, Iran's warnings are "sufficient to spike up oil prices, which helps Iran and hurts the West", he said.
Domestic Iranian politics are probably playing a part in Tehran's sabre-rattling. Mahmoud Ahmadinejad's government may well be keen to demonstrate its strength in the face of western challenges and to deflect attention from Iran's economic problems ahead of parliamentary elections in March. The Iranian president is locked in a power struggle with fellow conservatives who are loyal to Iran's supreme leader, Ayatollah Ali Khamenei.
Even so, Tehran would think hard about sealing off the Strait of Hormuz since, apart from the risk of a confrontation with militarily superior big powers, oil exports are the lifeblood of its economy.
"But I think if there was a full-scale embargo on their oil exports they'd do it, even though they know there'd be a massive response and they might end up losing more than they gained," a senior western diplomat in Tehran said.
Washington's intention, however, is seemingly not to cut off Iran's ability to export oil completely, a move that could well backfire on the West by pushing up energy prices.
Instead, the Obama administration's aim is to reduce Iran's oil revenue by diminishing its sales volume, forcing Tehran to give its customers a discount on the price of crude, The New York Times reported yesterday.
Tehran would rely on China and India, its biggest markets, to buy more of its oil if Iran loses the EU, which takes 450,000 barrels a day of Iranian oil, about 18 per cent of the Islamic Republic's exports.
The new legislation allows the US president to waive sanctions if they cause the price of oil to rise or threaten national security.
Iran insists sanctions will never force it to give up its nuclear ambitions, which it says are solely for civilian energy needs.
Mr Ahmadinejad declared yesterday Iran would never "yield to pressure" to abandon its right to nuclear technology.
Washington is relying on Saudi Arabia, the world's leading oil exporter, and other oil suppliers to increase their production to fill the gap left by Iran in the event of new sanctions. The European countries most reliant on Iranian oil are Greece, Spain and Italy, which are among the EU's weakest economies.
Iran's oil minister, Rostam Qasemi, said this month Saudi Arabia had promised not to replace Iranian crude if sanctions were imposed. Industry experts doubt Riyadh made any such promise.
"The Saudis don't want to make their relations with Iran any worse by saying in advance, 'We will compensate for any losses from Iranian production'," said Gerald Butt, editor of MENA Prospect, a weekly political risk newsletter.
But, he added: "It's very unlikely that Saudi Arabia would do nothing if western markets find themselves in short supply."