Iran Oil Embargo won't hurt Global Economy

A senior Iranian official delivered a sharp threat in response to economic sanctions being readied by the United States, saying his country would retaliate against any crackdown by blocking all oil shipments through the Strait of Hormuz, a vital artery for transporting about one-fifth of the world’s oil supply. The declaration by Iran’s first vice president, Mohammad-Reza Rahimi, came as President Obama prepares to sign legislation that, if fully implemented, could substantially reduce Iran’s oil revenue in a bid to deter it from pursuing a nuclear weapons program. Prior to the latest move, the administration had been laying the groundwork to attempt to cut off Iran from global energy markets without raising the price of gasoline or alienating some of Washington’s closest allies.

 

Oil prices rose above $100 a barrel in trading after the threat was issued, though it was unclear how much that could be attributed to investors’ concern that confrontation in the Persian Gulf could disrupt oil flows. The new punitive measures, part of a bill financing the military, would significantly escalate American sanctions against Iran. They come just a month and a half after the International Atomic Energy Agency published a report that for the first time laid out its evidence that Iran may be secretly working to design a nuclear warhead, despite the country’s repeated denials. In the wake of the I.A.E.A. report and a November attack on the British Embassy in Tehran, the European Union is also contemplating strict new sanctions, such as an embargo on Iranian oil.

For five years, the United States has implemented increasingly severe sanctions in an attempt to force Iran’s leaders to reconsider the suspected nuclear weapons program, and answer a growing list of questions from the I.A.E.A. But it has deliberately stopped short of targeting oil exports, which finance as much as half of Iran’s budget. Now, with its hand forced by Congress, the administration is preparing to take that final step, penalizing foreign corporations that do business with Iran’s central bank, which collects payment for most of the country’s energy exports. The sanction would effectively make it difficult for those who do business with Iran’s central bank to also conduct financial transactions with the United States. The legislation allows President Obama to waive sanctions if they cause the price of oil to rise or threaten national security.

To get clearer picture of this simmering global issue between Iran & West ,lets  compares its national capabilities & strength it garners today with respect to current developing scenario .

Iran exports 2.5 million barrels of oil per day, about 3 percent of world supplies. About 500,000 barrels go to Europe and most of the rest goes to China, India, Japan and South Korea. Iranian fields produce a type of oil known as "heavy, sour" crude. While common, these crudes are sulfurous and require more refining and expense to turn into valuable fuels such as gasoline. As a result, they generally cost refiners less than so  sweeter crudes.

It's  highly unlikely  that Iran will try to block the Strait of Hormuz. The international naval response would be overwhelming because the strait is the world's most important energy choke point. Each day, 14 tankers on average squeeze through a shipping channel that, at its narrowest, is just 2 miles wide. If Iran could block it, it would send oil prices spiking to $150 to $200, analysts say, and badly damage Western economies.

If that happened, Iran would hurt itself and its best customers, not just Western nations and producers like Saudi Arabia that also use the strait. Eighty-five percent of the oil that travels through the strait goes to Asian nations, which are not participating in the embargo. Also, it would be all but impossible for Iran to keep its oil flowing through the strait while it tries to block oil from other countries.

Because the strait is likely to remain open, keeping supplies flowing. And because Asian countries, already Iran's biggest customers, aren't joining the Europeans in banning Iranian oil. Also, the European embargo doesn't start until July, so oil markets will likely have time to adjust.As Europe turns away from Iran to other markets, though, it could push up prices for certain types of global crudes. And the animosity  between Iran and the West may already be having some effect on prices,. The U.S. is pressuring other Middle East and African nations to increase production to help keep Europe and the world well-supplied as the embargo slowly takes effect.Still, an increase in production from other nations would leave little  room for those countries to increase supplies further if needed. The oil market gets nervous, and sends prices higher, if it thinks producing nations don't have capacity to pump more oil to make up for a supply interruption somewhere in the world.

Considering the fragile political & economic potential of  isolated Iran under  huge  economic clout exercised by US & its allies ,it highly improbable that it might hurt the Global economy  in long term with some stray untoward incidents that might be unleashed  from infuriated Iran spiking the Global oil prices for limited time by the negative speculations surrounding it.