Iran’s Threats to Close the Most Trafficked Oil Route May Drive up Prices

Iran’s Threats to Close the Most Trafficked Oil Route May Drive up Prices

This first batch of sanctions include restrictions on Iran’s manufacturing, aviation and automobile industries. The next round comes on November 4th, and will specifically prohibit international companies from doing business with the Iran’s oil and gas sector.

Recently, it was reported that Iran’s Revolutionary Guards staged a large-scale military exercise in the Strait of Hormuz, where nearly a third of the world’s oil supplies pass. IRGC leadership has said that it is eager to carry out President Hassan Rouhani’s threat to close the oil chokepoint.

Jacob Shapiro, Texas-based think tank Geopolitical Futures’s Director of Analysis, told Newsweek it was “exceedingly doubtful” that Iran would ever actually risk shutting down the critical lifeline for global oil trade, however, he said that “the consequences of taking this step would be dire.”

Shapiro said, “If Iran decided it had nothing left to lose because U.S. sanctions are effectively killing Iranian oil exports and prioritized looking strong at home over all else, there would be a large, short-term spike in the price of oil. After all, about 30 percent of all seaborne-traded crude oil goes through the Strait of Hormuz.” He added, “But the important thing to keep in mind here is it would be a temporary spike. Sooner or later (and probably sooner), the Strait of Hormuz would be reopened. U.S. shale producers would send production into overdrive. Russia would also look to increase production and replenish its much-depleted coffers. The most significant consequence of a Strait of Hormuz closure might ironically be a cash infusion for Russia’s struggling economy.”

According to Shapiro, such a move by Iran would be unsustainable, as it would “result in a foreign intervention.” Most likely, the U.S. military would get involved on behalf of Kuwait, Saudi Arabia, Qatar and the United Arab Emirates. He says that the Iranian military simply does not compare in terms of strength.

Regarding the recent Revolutionary Guards recent exercise, U.S. Central Command chief General Joseph Votel told reporters at the Pentagon Wednesday that Iran was “trying to use that exercise to send a message to us that, as we approach this, the period of the sanctions here, that they had some capabilities.” Votel said that the exercise—which involved some 100 Iranian vessels—did not coincide with any harassment of foreign personnel. Still, incidents between U.S. and Iranian vessels have previously occurred in the region’s tense waters.

“Iran has a layer of capabilities here, you know, including mines, that include explosive boats, that include, you know, coastal defense missiles and radars, and other things. So, you know, they certainly have some capabilities there. But I would just suggest we have capabilities as well.” Votel added, “And, you know, we routinely focus on de-mining exercises in the region and we maintain the forces and readiness, as do some of our partners in the region that are well-trained, well-prepared to deal with these types of situations.”

Iran would jeopardize its own reputation, as well. Countries like China, Iraq and India, who are still willing to do business with Tehran, may turn against Iran because they are dependent on the Strait of Hormuz being open.

The U.S. has found itself largely isolated internationally in regards to Trump’s recent decertification of the Iran nuclear deal. Fellow nuclear accord signatories China, France, Germany, Russia and the U.K. have roundly rejected Trump’s argument for abandoning the deal. The EU has even threatened to impose counter-sanctions on any companies that adhere to the unilateral U.S. measures.

Iran is capitalizing on the situation. In fact, Iranian Foreign Minister Mohammad Javad Zarif told the state-run Islamic Republic of Iran News Network on Wednesday that “no one trusts America anymore”. He added that Rouhani’s warning was “a warning to the Americans, who deal in psychological warfare.”