As global sanctions against Iran over its nuclear program are getting tighter, Iran has started to respond with its own cards. Tehran's threat to close the Strait of Hormuz on December 27 last year not only provoked energy markets and raised crude prices, it also increased tension and spread panic about security in Persian Gulf. But is this a real threat or Iranian diplomacy in the absence of real diplomacy between Iran and the U.S. If it is not a real threat, what is the message behind the bombast?
Various unilateral and multilateral sanctions targeting Iran have been imposed in the past months over its nuclear program. The Iranian regime, however, has been astute at absorbing such new pressures, while finding new -- though taxing -- ways of circumventing sanctions. However, as sanctions are increasingly targeting Iran's oil income, the regime's lifeline, the Iranians are showing greater sensitivity to these sanctions. The Iranian regime knows very well that the oil income is both a red line and the country's Achilles Heel. Timed with Iranian Naval exercises around the Strait of Hormuz, Iran's first Vice President Mohammad Reza Rahimi warned on Tuesday "if Iran oil is banned, not a single drop of oil will pass through Hormuz Strait."
How Iran lives with Sanctions
The European Union is likely to adopt an oil embargo on Iran on January 30, 2012. Iran exports almost 450,000 barrels of oil a day to this region, and is the fifth largest supplier of oil to the EU after Russia, Norway, Libya and Saudi Arabia. Although this accounts for less than a fifth of Iran's oil exports, Iran can still sell its oil to other costumers by offering premium discounts and could, conceivably, substitute its costumers. However, European diplomats announced on January 6 that the EU embargo on Iranian crude oil imports could take a few months to start, as some of EU capitals would like to delay this embargo in order to protect their economies.
According to economic advisors to EU, this delay is because Saudi Arabia, which is expected to cover Iran's share in this market, is not offering the same terms and prices that Iran does for its export crude oil to Europe. When I served in the National Iranian Oil Company International (NIOCI), in the department in charge of marketing and selling crude oil, I learned that Iranian oil officials are effective negotiators and can offer discounts in order to maintain their customer base.
The experience of the Iran-Iraq war (1980-88), sanctions and a U.S oil embargo against Iran since 1979, taught them to use different reward mechanisms and discounts to maintain customer loyalty. Therefore, when oil prices are high, whether due to sanctions or a possible European oil embargo, NIOCI will simply absorb new demand from other regions for its oil by selling its crude oil under the international market price. In a way, Iranian revenues, while somewhat diminished, can almost bend the conventional laws of market economics. Iran could even circumvent those sanctions that target its Central Bank's activities by commencing barter trade with its customers, including China, who imports 11 percent of its oil from Iran, and with India. In fact, this is precisely what Iran did between 1980 and 1988 during the Iran-Iraq war.
Unlike other major oil producers in the Persian Gulf, Iran has diverse recourses and other sources of income. There is no guarantee that an embargo of Iranian oil will precipitate a swift collapse of its government, nor is there a good assessment of how long this country can weather an oil embargo. Still, an embargo of Iran's oil (which is more than 10 percent of OPEC's daily export) could cause a major disruption of supply. It will undoubtedly have an immense effect on prices.
Actual threat or a rhetoric device to convey a massage
But what would happen if Iranian oil imports are boycotted universally? Iran's economy relies on oil for almost 80 percent of its government revenue. It would certainly hit it hard. Iran would likely consider this a severe threat to its national interest and the regime's existence, which would force it to play its 'last card'. By announcing that Iran would "close the Strait of Hormuz if Iran's oil is banned," Iran is communicating that targeting its ability to sell oil is a red line -- an act of war.
True, Iran may not be able to effectively close the Straight, but that misses the point: for Iran, it doesn't matter. If Iran sinks a mere ship or two in its own territorial waters to disrupt the flow of oil from this passage, even for a short time, without any formal military strike in the passage lanes, this would put immense pressure upon energy market and oil prices. Energy experts expect that even a partial blockage of the Strait of Hormuz could raise the global oil price $50 a barrel or more. This could quickly push the price of regular gasoline over $4 a gallon.
Iran can close the Hormuz Strait in two ways, conventionally and unconventionally. Conventionally Iran can use speedboats, submarines, warships, anti-cruise and ballistic missiles to simply cause difficulties in the Straight. This might precipitate a strong response from Western powers against Iran. But Iran can also use unconventional tactics, such as sinking three or four of its own empty tankers in Iranian territorial waters and simply cause a 'traffic jam'. Any closure of Strait of Hormuz, temporary or prolonged, will flame a regional conflict and would prove to be a great challenge to global energy markets. Even Saudi spare capacity would prove unhelpful until this passage reopens.
However, since this might cause military strikes against Iran, Tehran will likely keep this as its 'last card'. Closing the Straight, albeit temporarily, is their way of signaling that there are some bargaining chips that it cannot tolerate being deprived of. Since there is no ongoing dialogue between the US and Iran, the threat to close the Straight of Hormuz should be seen as an act of subtle diplomacy in the absence of ambassadors and embassies. It is not a desire to disrupt global energy markets, which would destroy any support Iran has from other countries (such as Russia and China) opposed to sanctions. Thus, it is a rhetorical device, a warning rather than a promise. It is a massage to remind the US and Europe that Iran plays a major role in global oil security and energy markets, and also to counter the convenient idea that Saudi spare capacity would simply replace Iranian oil and leave markets in tact.
These warnings should not be seen as 'bluster' by an irrational regime, but as an expression of Iran's rubric of national security.
Dr. Sara Vakhshouri was a former advisor to the Director of the National Iranian Oil Company International (NIOCI). She has published extensively on energy security, crude markets and US sanctions on Iran. She is based in Washington DC.