News / Middle East

Iran Threat to Close Strait Could Hurt Economic Recovery

The international community is bracing for the possibility that Iran might attempt to close an important oil shipping lane in response to the European Union's new ban on the purchase of Iranian oil.  The oil embargo is part of a wider range of economic sanctions aimed at forcing Iran to be more open about its nuclear program.

Iran Threat to Close Strait Could Hurt Economic Recovery
Iran Threat to Close Strait Could Hurt Economic Recovery
Nearly one-fifth of the world's traded oil passes through the Strait of Hormuz, much of it destined for Asian and European nations.

Lucian Pugliaresi at the Energy Policy Research Foundation says any attempt to block the shipping route could send oil markets into a frenzy. "If there were an action by Iran to close the Strait of Hormuz, we would probably see an initial spike of oil prices, who knows, $40, $50, $60 a barrel," he said.

With fuel demand rising in China and other emerging nations, the severity and length of higher fuel prices would depend largely on how long the Strait remained closed,  and whether other oil producing countries stepped in to fill the demand.

"The real issue here is that we are part of a highly integrated world oil market and that a disruption in any place in the world causes consequences everywhere in the world," said Pugliaresi.

The latest round of European sanctions includes freezing Iranian assets and banning its oil imports to Europe.  Iranian lawmakers responded Monday by renewing threats to shut down the strategic route.

Many Western analysts believe Iran is bluffing, but Pugliaresi is not so sure. Oil accounts for 80 percent of Iran's foreign revenue, about 2 million barrels of oil per day. "Once you close the Strait of Hormuz and then once you take action to open it up, there's no telling what the Iranians might do. They may engage in a lot of what's called asymmetric responses, which could add to a lot of turmoil in the Middle East," said Pugliaresi.

The United States has warned it will not allow Iran to close the Strait. However, the threat of a blockade has already sent U.S. gasoline prices to a 12-month high.  

Pugliaresi says instability in many of the world's largest oil producing nations is adding to economic uncertainty for consumers, and could derail an already weak global recovery.  He says it also underscores the need for the U.S. to greatly expand its domestic energy production.

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