Oil has marked a sharp rise from last week as Iran threatened once again to close down the Strait of Hormuz in response to sanctions imposed on its oil exports. About one fifth of the global crude flows through the strait and any disruption to its supply could send oil prices skyrocketing.
In signs of growing desperation among Iranian leadership, Iranâ€™s OPEC Governor Mohammad Ali Khatibi said that Iran might take control of the Strait of Hormuz adding that the global economy would not be able to deal with the shock of a shortfall of 20% of its oil. He also warned that Tehran would regard as unfriendly any move to replace the shortfall of its oil. Oil futures rose by 1.1%, after falling by 2.8% last week.
Another issue that has adversely impacted crude prices is a strike by Nigerian labor unions on a , which has presently been suspended
Supply worries from Iran, which produces 5% of global crude, and Nigeria have combined with increased demand from developing countries to drive prices higher, one analyst said.
Meanwhile momentum for the sanctions on Iranian oil has been growing. Britainâ€™s prime minster said that he was confident the European Union will be able to embargo Iranian oil. In a meeting last week the EU had pushed back the date for imposing sanctions by six months in order to give countries like Greece and Italy more time to find replacement for Iranian oil. In signs that other buyers of Iranian crude have started looking for replacements, China has started exploring ways to deepen its access to Saudi Oil.
Though OPEC has promised to raise production to replace any shortfall in Iranian oil, an article on the Economist said that the present global capacity was simply not enough to pull in an additional 4 million barrels of oil per day, which is the current level of Iranian production.
The commentator James Hamilton said it remains an open question whether the sanctions will be fully imposed in a manner that will really hurt Iran. Some countries would start buying more Iranian crude as others would embargo it, which would cause dislocation but no real harm to Iranian economy, reducing the sanctions to a symbolic gesture.
A supply disruption of the magnitude of the Iranian production has historically been associated with price increases between 25% and 70%, Mr Hamilton notes. Were such a disruption to take place at this time, it can potentially send an already tottering US economy back into recession. There is no telling what impact it would have on the fragile Eurozone. So, should we then regard talks of sanctions as empty threat?
If the US regulation that President Obama signed into law last month is anything to go by, this time it is dead serious. The law bans any entity which trades with Iranian central bank from access to the US financial system. The Iranian central bank processes monetary transactions related to its oil exports. But it is also true that if Iran were able to close the Strait of Hormuz, it can bring the global economy to a grinding halt.
Adding a further element of complication, this is an election year, in the US as well as in Iran, which means neither side will want to blink first.