Iran's crude threats

Oil is surging to seven-month highs on worries the Iranian navy will close the crucial Strait of Hormuz transit point. Here's a look at the potential impact.

By Anthony Mirhaydari Jan 3, 2012 6:21PM

So, 2012 started right where the old one left off: Turmoil in the Middle East pushes crude oil higher, defanging the Federal Reserve on inflationary fears and threatening an already weak and fragile economy.


Sure, it's all about Iran this time and its boisterous saber rattling and nuclear ambitions instead of the blossoming of democracy during the Arab Spring. Specifically, with the European Union moving toward an embargo of Iranian oil imports, and with Israel and the United States getting itchy trigger fingers over Iran's nuclear program -- which claims it just enriched its first fuel rod -- the regime there has stepped up its threats to shut down the Strait of Hormuz through which 17 million barrels of oil per day flows. That's worth 35% of seaborne traded oil. 


Yet the result is the same: Higher energy prices and the predictable consequences that will surely follow, as the U.S. Oil Fund (USO) closes at its best levels since June. Here's why.



It started over the Christmas holiday as the Iranian navy conducted a 10-day exercise in the strait which finished with a test firing of two long-range anti-ship missiles that could be used to target American aircraft carriers. The aircraft carrier USS John C. Stennis steamed right through the Iranian exercise on December 27 en route to the Arabian Sea in what surely could be described as an American show of force.  


Belligerent nations, like schoolyard bullies, always respond quickly to tests of resolve.


Sure enough, earlier today an Iranian military general said the country was prepared to take necessary action if the Stennis returned to the Persian Gulf. Since the U.S. Navy's Fifth Fleet is stationed in Bahrain, the Stennis, or another carrier, will surely return. Indeed, the Pentagon said later in the day that the United States will continue to operate in the Persian Gulf.


There's good reason for this. Some 25% of the world's tradable oil supply passes through the Strait of Hormuz, with a majority of Saudi Arabia's and Iraq's output transiting there, as well as all of the output of the U.A.E., Kuwait and Qatar.


And the threat is serious. Standard Chartered analysts believe that if Iran made good on its threat (a decision on a European embargo is due by the end of the month), the loss of 17 million barrels per day would not be easily offset. The Saudis could send another seven million barrels through its East-West Pipeline into the Red Sea, but that would add another five days to any trip to Asia.


Other options include a new pipeline in Abu Dhabi that could carry 2.5 million barrels per day into Oman. Another 1.7 million barrels per day could be sent through the Iraq Pipeline across Saudi Arabia (IPSA). There has also been talk of restarting the out-of-service Trans-Arabian Pipeline to Lebanon, which has been shuttered since 1990 and was originally constructed in 1947. But that would only add another 500,000 barrels per day.


As you can see, supplies would be tight.



Yet, Standard Charted notes that the recent price action in oil suggests traders aren't yet pricing in a disruption of this scale. Instead, the more likely outcome is that Iran's exports are curtailed as Europe stops buying and its supply is diverted to Asian customers.



Even this, if it's enough to keep crude near $100 a barrel, will pressure already sensitive consumers as well as keep inflation too high for the Federal Reserve to unveil another round of stimulus, as it's been hinting of via mouthpieces in the media. When the $600 billion bond buying initiative, the second round of "quantitative easing" we've seen so far, was started in late 2010 crude was trading near $70 a barrel. Consumer price inflation was also running at around a 1% annual rate, compared to more than 3% now.


Assuming Iran is bluffing, the biggest threat is that its chest thumping will keep the Fed on the sidelines by keeping energy prices aloft. Chairman Bernanke, meet Iranian Brigadier General Ataollah Salehi.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.


The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Jan 3, 2012 7:23PM
What this means is the speculators are going to make a lot of money and the rest of us are goint to get f--ked!!
Jan 3, 2012 11:57PM
Know why the New Iranian Navy wanted glass bottoms in their boats? so they can see the Old Iranian Navy!  I know they aren't rocket scientists but surely these guys are not stupid enough to pull the trigger on this hornet's nest!  They will block the Straits of Hormuz all right.... with their sunken navy ships. 
Jan 4, 2012 11:16AM
The Iranians do have the anti-ship missile power to kill even an American carrier, but that would be an overt declaration of war, a step their leadership has so far been unwilling to take.  However, if some hot-headed local commander manages to launch a strike and fail to kill the carrier, the counter-strike will indeed leave the Iranian navy on the bottom and every identifiable missile site will receive a GPS-gift from some B-2s a day later.  Someone needs to call their bluff or see if they are willing to back their threats and risk becoming a "target-rich environment".
Jan 3, 2012 9:42PM
Iran is a joke.  Attacking one of our Carriers, is like them bringing a knife to a gun fight.

 Bring it on Iran, I don't think we are too worried.  Your missals are like toy rockets compared to what we would do to your Navy. lol.
Jan 4, 2012 10:36AM
All based on worries and same old BS of turmoil in middle east. Just an excuse to screw the consumer. All these speculators should be beaten and whipped.
Jan 4, 2012 11:04AM

It's time to put Iran in it's place! we just need to park a couple of destroyers off there cost.

Then tell them publicly that if they want to make good on there threats then to do it.  This saber rattling by North Korea and Iran has to stop.  They need to learn that if they keep  making threats to the rest of the world then they will end up like Sodom did. 


Jan 3, 2012 9:35PM
Big oil just needs another **** excuse to raise prices.   I hope that the USS Stennis is backed up properly so that we don't lose that ship in a sea fight.  Keep two more carriers nearby and a few missle frigates to ensure that any firefight ends well for US Sailors.
Jan 3, 2012 11:51PM
The only thing that worries me is that the leader of Iran is a religious zealot who believes that if he starts a nuclear war that the twelfth Imam will appear along with Jesus Christ and start a holy war that he believes Islam will win aided by Jesus Christ.  Hitler was crazy and defeated at last but not before millions of lives were lost forever!
Jan 3, 2012 9:49PM
Iran isn't going to follow through on their empty threat! It's hollow! If they shut off the Strait AND start military action with the U.S. and Europe, it's only going to hurt them. How are they going to get their oil to their 2 biggest customers, China and Russia?? They won't be able to! Granted, the Iranian government is nuts, but they're not stupid. They're not going to cut off their noses to spite their faces. They'll just continue to bluster. That seems to be a common thing in the Middle East these days.
Jan 3, 2012 8:23PM

The Iranians want our carrier in the gulf.  It is too congested for a carrier to be effective.  Too much risk of an enemy combatant getting too close.


 When the carrier moves out of the gulf is the time for the Iranians to worry!

Jan 3, 2012 10:32PM
the usa should have never let it get this far! iran needs a quick awaking even if it means war! plus we have oil and we have new fields being drilled and your just caping them! are goverment isn't protecting us and theres an admendment that we the people can fire the goverment and put a new one in and i think it's about do today the longer we wait the more they take us in  to the hole!! wake up america
Jan 3, 2012 8:23PM



One thing that you fail to mention is that every major down turn in the U.S. economy for the past 40 years has been preceded by an oil shock.

Jan 4, 2012 11:27AM
Such bull, everyone knows Iran has no intention of closing the passage, just wants to get the oil prices higher and cause strife and economical stresses. Profiteers love this as shown by the higher prices at the pump. Same ole same ole. Tell Obama to allow drilling in the Gulf and around Florida coast. Or vote him out. China is right now using direct drilling to bore in to the caribean floor for Cuba with Venezuela help. What is the difference? USA or China/Cuba getting the drilling done. We need to get the people wringing their hands to shut up and use our natural resource. N. Dakota oil fields are a big boom and thousands of new jobs but could be shut down overnight with the EPA ruling that frackling is bad - 99.99% water with a lubricant is not a pollution problem!! filter it out with a 
Jan 4, 2012 1:04AM
Elevated tensions in the Gulf keeps the price of oil up too.  Since Iran's economy depends mostly on oil, a high price is good for them.    
Jan 3, 2012 9:37PM
we need a WW3  to fix this economy and this is the perfect time to carry it out!! lets danceSmile
Jan 4, 2012 12:55PM
the simple answer is to stop the speculators on our own shores from raping americans using iran as an excuse its pure wall street greed folks that plays the iranian hand much to thier delight iran wins we loose thanks wall street punks

"Iran's Crude Threats?" Tony, are  you borrowing from Leno's writers now?


The U.S. and EU are really putting the screws on Ahmanjinedad and the Ayatollah. Although Khameini is supposed to be the last word as the "Supreme Leader", A-man generally presents himself as maniacal and unpredictable. Since he is not out front on this campaign, I suspect the Islamic Republic itself is pretty serious this time. In either case, if current events results in higher oil prices, this will shake the economy and the patience of the worlds economies to its core.  The only winners may be China or Russia. Another case for renewable energy I say.   


Also, I'm a genie's bottle and stones throw from Iran at the moment, but I don't feel particularly threatened by the latest round of the Persian Regime's saber rattling. However, it doesn't hurt to have a few good Patriot Missile batteries around the corner.



Jan 4, 2012 1:03PM
We need to stop exporting our Nations oil Yes exporting our oil and stop refining gas to send to Mexico.
Jan 4, 2012 12:32PM

Our energy policy needs to be changed. We are on the mercy of middle east countries as our appetite for oil is ever increasing, and on the other hand those countries will always be against us. Hence the oil will remain a sensitive and necessary item for us. The world population is increasing (specially in Islamic countries) and soon to pass 10 billion mark within 20 years time. This means that demand for all items including oil will keep on growing more and more and price will keep on going through the roof.

On the other hand oil, natural gas etc item's availability will keep on depleting as the mother earth has a limited amount resources available. The demand for energy and food will be two major items that will be becoming more and more expensive.

The energy demand can be met if we put our focus on developing safe NUCLEAR FUSION energy. This can be a solution we really focus on developing a safe method of producing it. This will be a perpetual form of energy and will solve the energy requirements of the future. Even a car, or plane can be running on this energy of developed in a safe way. Instead of being afraid of this form of energy, it is time that we need to start looking producing this form of energy safely.

Jan 4, 2012 1:53PM
Ok, well the united states needs to quit exporting oil to other countries and keep it here. It would surprise most folks to learn that we export more oil then we import!!. That's right!!. I have a great idea!!. Lets quit all this nonsense of importing and exporting and just use what we make here!!. Lets fend for ourselves, and let other countries do the same. Of course that would be to easy!!
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