Iran Threatens Oil Blockade Over Sanctions

Brent crude snaps six-day rise as markets dismiss rhetoric

Oil traders ignored Iran's threat to choke off oil exports. (Photo: AP) Oil traders ignored Iran's threat to choke off oil exports. (Photo: AP)

As the U.S., and possibly the European Union as well, seek to tighten sanctions on Iran to discourage the country from pursuing nuclear weapons, Tehran has responded by threatening to cut off all oil from passing through the Strait of Hormuz—where the country has just begun 10 days of naval operations. Markets, however, paid little attention and Brent crude actually snapped a six-day increase as the country's threats were largely dismissed as rhetoric.

In a New York Times report, Iran’s first vice president, Mohammad-Reza Rahimi, said the country would strike back against any tighter sanctions by blocking all oil shipments through the strait, through which approximately a fifth of the world’s oil supply passes on its way to customers around the world. His threats are seen as fear that expanded sanctions contained in legislation about to be signed by President Barack Obama will have a severe effect on the country.

Apparently the threat of sanctions is a matter of concern to the Iranian leadership, since the Iranian currency is falling against the dollar and there are rumors of bank runs. Even though Iran is the third largest exporter of energy, it already is facing tough economic times.

Through Iran’s official news agency, Rahimi said, “If they impose sanctions on Iran’s oil exports, then even one drop of oil cannot flow from the Strait of Hormuz.” Whether that threat can be carried out remains to be seen, since the U.S. has plans in place to prevent a cutoff of oil transport.

Its threats were dismissed by Washington as "an element of bluster" and by markets that, after six days of increases in the price of Brent, moved to profit taking instead. Reuters reported that Thorbjoern Bak Jensen, oil analyst with Global Risk Management, said, "The threat by Iran to close the Strait of Hormuz supported the oil market yesterday, but the effect is fading today as it will probably be empty threats as they cannot stop the flow for a longer period due to the amount of U.S. hardware in the area."

Abbas Milani, director of Iranian studies at Stanford University, “Iran’s economic problems seem to be mounting and the whole economy is in a state of suspended expectation. The regime keeps repeating that they’re not going to be impacted by the sanctions. That they have more money than they know what to do with. The lady doth protest too much.”

The Obama administration aims to cut Iran’s oil revenue through cutting its sales volume, and forcing it to give its customers a discount on the price of crude. Some economists debate the feasibility of such a strategy, with investment bank analysts cautioning that the price of gasoline may rise in 2012 under the new U.S. sanctions and possible complementary ones from the EU.

Should the measures fail to achieve the desired result but instead cause the price of oil to rise and threaten the economy and/or national security, the president has the option to waive them.

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