Posted by: mulrickillion | January 3, 2012

A Dangerous Mix: Iranian Oil and U.S. Sanctions


An Iranian warship and speed boats take part in a naval war game in the Persian Gulf and the Strait of Hormuz, a waterway crucial for global oil supplies. Reuters/Fars News.

by Vali Nasr, Senior Fellow, Foreign Policy, Brookings Institution, Dec 29, 2011 —

Iran has threatened that it will retaliate against the Obama administration’s proposed new economic sanctions on Iran’s oil exports by blocking the flow of oil from the Persian Gulf. "If sanctions are adopted against Iranian oil," said Iran’s Vice President Mohammad Reza Rahimi, "not a drop of oil will pass through the Strait of Hormuz," the narrow waterway at the mouth of the Persian Gulf, which one-fifth of the world’s oil supply passes through daily. . . .

The administration’s strategy is based on the assumption that cutting Iran out of the oil market will not substantially impact world oil supply and prices. Saudi Arabia can step up production to cover the loss of Iran’s export of 2 million barrels a day.

But it is not clear whether Saudi Arabia actually would increase production to compensate for the loss of Iranian oil. Iran has clearly started a charm offensive with Riyadh to influence the Saudi decision. Iran’s intelligence minister recently visited Riyadh to reduce tensions between the two countries in the wake of the alleged Iranian plot to assassinate the Saudi ambassador to Washington, and the Iranian Navy has claimed that it rescued a Saudi ship from pirates.

In facing off against the U.S. and its European allies, Iran thinks it holds economic cards of its own and is announcing loud and clear that if push comes to shove, it intends to use them.

Iran notes that Western economies are under stress and predicts they could not afford higher oil prices. Even the threat of disruption in oil supply would send energy prices spiraling sky high, and that would plunge the already struggling economies of the United States and Europe into deeper recession. Iran is hoping to change the conversation in Western capitals from how tightly to squeeze Iran to what could be the cost of doing so.

Nor would economic woes caused by conflict in the Persian Gulf remain limited to the West. Persian Gulf exports already account for 60% of Asia’s energy consumption. Economies from India to China would be impacted by a Persian Gulf oil cutoff and higher energy prices. Iran is in effect threatening global economic crisis.

Those advocating new sanctions on Iran’s oil industry have said little about the potential cost to the global economy. . . .

A Dangerous Mix: Iranian Oil and U.S. Sanctions – Brookings Institution


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