Bloomberg News

Iran Might Hurt Self Most by Closing Strait of Hormuz Oil Route

January 11, 2012

Dec. 29 (Bloomberg) -- It would be relatively easy for Iran to make good on its threat to close the strategic waterway that carries oil tankers from the Persian Gulf -- and it would probably hurt itself most by taking such action.

“Iran is as reliant, if not more reliant, on the Strait of Hormuz than any other country,” said Ali Nader of the RAND Corp. research institute in a telephone interview.

Iran has threatened to halt traffic through the strait if the West moves to toughen sanctions including an oil embargo to pressure Iran to abandon its nuclear program. The strait is the passageway for about a third of the world’s seaborne-traded oil last year, according to U.S. Energy Department data.

“Iran has total control over the strategic waterway,” Iranian Naval Commander Admiral Habibollah Sayari told Iran’s Press TV yesterday as the Iranian navy conducted a 10-day exercise in international waters. “Closing the Strait of Hormuz is very easy for Iranian naval forces.”

“The free flow of goods and services through the Strait of Hormuz is vital to regional and global prosperity,” said Lieutenant Rebecca Rebarich, a U.S. Navy spokeswoman in Bahrain, site of the 5th Fleet headquarters, in an e-mail. “Any disruption will not be tolerated.”

NYMEX crude oil prices fell back yesterday after rising by about 1.5 percent to more than $101 a barrel the previous day, when Iranian Vice President Mohammad Reza Rahimi threatened to close the 21 mile-wide strait if the West imposed new sanctions.

NYMEX West Texas Intermediate crude fell some 1.7 percent to $99.65 a barrel in New York, and ICE Brent Spot fell more than 1.7 percent to almost $107.40 a barrel.

Impact on Iran

U.S. officials and outside experts concede that Iran could block the strait, at least temporarily. Testifying to Congress in March, Defense Intelligence Agency Director Army Lieutenant General Ronald Burgess said that Iran is expanding its Persian Gulf naval bases, allowing it to “attempt to block the Strait of Hormuz temporarily” during a crisis.

Were Iran to make such a move, it might be hurt more than its adversaries.

Iran’s economy is shaky, as is popular support for its clerical rulers, Nader said. The country is facing new Western efforts to halt its suspected nuclear weapons program, including U.S. sanctions that are awaiting President Barack Obama’s signature and a possible European Union ban on imports of Iranian oil.

According to the U.S. Energy Information Administration, Iran’s net oil export revenues were approximately $73 billion in 2010; crude oil and its derivatives account for nearly 80 percent of Iran’s total exports; and oil exports provide half of the nation’s government revenue.

Iran’s Best Customer

Moreover, according to the EIA, Iran’s best customer is China, which took about 22 percent of Tehran’s oil exports during the first half of this year and is a member of the United Nations Security Council and one of the few nations on friendly terms with the Islamic Republic.

China gets 11 percent of its crude oil imports from Iran, according to the EIA, while Turkey, a NATO member that shares both a border and antipathy toward Kurdish separatist groups with Iran, got 51 percent of its imported crude oil from the Islamic Republic from January to June of this year.

In August, Iran’s Press TV reported that Iranian security forces killed three Kurdish rebels suspected of blowing up a major pipeline that carries Iranian natural gas to Turkey on July 29.

Dire Strait

While closing the Strait of Hormuz, even briefly, would hurt Saudi Arabia, Iraq and other Gulf oil exporters, the Saudis also ship oil via the Red Sea. All of Iran’s exports and many of its imports of gasoline, food and consumer goods are shipped through the strait.

Iran’s main oil terminal at Kharg Island, which has a loading capacity of 5 million barrels a day and storage capacity for more than 30 million barrels, is in the Persian Gulf. So is its second-largest export terminal, at Lavan Island, with storage capacity of 5 million barrels and a loading capacity of 200,000 barrels per day.

Nevertheless, said Anthony Cordesman, an analyst at the Center for Strategic and International Studies in Washington, Iran’s threats to close the strait are only the beginning of what could be five to 10-years of feints, attacks and rising tensions in the Gulf.

That, Cordesman said in a telephone interview, could require the U.S. to change its military posture in the Persian Gulf region at a time when the U.S. is facing intense budget pressures and the Obama administration has signaled its intention to focus more attention on the Pacific.

Rhetoric or Reality?

“Closing the Strait of Hormuz is really an exercise in rhetoric,” Cordesman said. With shipping channels passing Iranian or Iranian-held islands, floating mines, small craft and missiles could halt tanker traffic or raise risk premiums so high that insurance rates alone would drive up the cost of oil or stop shipping, he said.

An all-out conflagration might be too high a cost for Iran, at least until its nuclear weapons program produces enough weapons to make a credible deterrent, Cordesman said.

“We have been through an awful lot in the Gulf, where nothing has escalated or triggered a major conflict,” he said.

“When you are raising oil prices by having tankers pay higher insurance premiums, it’s out of hand, but the question is how much out of hand,” he said. “You have to be careful in going from Iranian statements which are also aggressive to assuming we are in middle of a crisis -- we aren’t yet.”

The potential worry now, however, said Nader, is that an Iran that feels threatened by tougher Western sanctions, by the uprising in neighboring ally Syria and by the broader rebellion against autocrats elsewhere could miscalculate and trigger a conflict that neither it nor anyone else wants.

--With assistance from John Walcott, Tony Capaccio and Steven Komarow in Washington. Editors: Mark Silva, Steven Komarow

To contact the reporters on this story: Peter S. Green in New York at psgreen@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus