Center for a New American Security

Oil prices rose slightly on Wednesday due to increased tensions between the United States and Iran. The price of oil jumped more than $4 a barrel after the Iranian military warned on Tuesday that the U.S. aircraft carrier USS John C. Stennis not return to the Persian Gulf. The U.S. military dismissed the Iranian threat, stating that the United States will remain committed to ensuring the freedom of access and navigation of the Strait of Hormuz, an international waterway recognized by longstanding maritime norms, as well as the UN Convention on the Law of the Sea. “The deployment of U.S. military assets in the Persian Gulf will continue as it has for decades," said George Little, the Pentagon’s press secretary.  

Despite what appears to many as saber-rattling, energy analysts have cautioned that increased tensions between the United States and Iran could have serious implications on the global price of oil. For example, if Iran were to actually blockade the Strait of Hormuz, through which nearly 20 percent of the world’s oil is shipped, the price of oil could climb by 50 percent in just a few days. “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,” The New York Times reported on Wednesday.

It is unlikely that Iran will impose a blockade on the Strait of Hormuz, since such a move could be self-destructive – surely much worse than the cost of U.S. sanctions. But the threat of an Iranian blockade may be credible enough to affect the price of oil. The New York Times added on Wednesday that “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.”

What may be more worrying is the threat of another tanker-war scenario like the one the world witnessed in the 1980s, which raised war risk insurance premiums for ships in the Persian Gulf. During the Iran-Iraq war, Iran sank Kuwaiti-flagged oil tankers carrying Iraqi oil, prompting the London-based ship insurer Lloyd’s of London to increase the insurance premiums on Kuwaiti ships. Although the increase in premiums did not immediately affect the global price of oil, eventually the risk became so great that the only way to encourage shippers to transport oil out of the Persian Gulf (and for Lloyd’s of London to insure them) was with a U.S. commitment to re-register the vessels with American flags and provide them a military escort while in international shipping lanes. Thus, even the credible threat of an Iranian anti-access, area denial campaign in the Gulf could affect the transport of oil through the strait if shipping companies are unwilling to assume the risk of moving oil through the Strait of Hormuz.

Meanwhile, Iran’s threat is already having geopolitical implications in Asia, where, The New York Times notes that “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.” The Wall Street Journal reported yesterday that South Korea and Japan may try to negotiate with the United States over U.S. sanctions on Iranian oil, since both countries receive about 10 percent of their oil supply from Iran.  

It is unclear how tensions in the Persian Gulf will affect oil prices in the near term, but energy analysts are sure to keep a watchful eye on events as they unfold.