January 05, 2012

Iranian Saber-rattling and the Price of Oil

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

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
.” 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.