Iran Threatens to Block Oil Flow Through Vital Strait of Hormuz in Response to U.S. Sanctions

Tensions between Iran and the U.S. escalated on Tuesday when a senior Iranian official, in response to economic sanctions being readied by the U.S. in an attempt to thwart Iran’s nuclear ambitions, said his country would retaliate against any crackdown by blocking all oil shipments through the Strait of Hormuz, a vital artery through which one-fifth of the world’s oil supply is transported.

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On Tuesday, President Obama prepared to sign in new sanctions that could substantially reduce Iran’s oil revenue in a bid to deter it from pursuing a nuclear weapons program. Iran’s first vice president, Mohammed-Reza Rahimi, responded with a vow to block all oil exports via the Strait of Hormuz, a move that has the potential to incite a military conflict among countries dependent on its supply.

Obama administration officials have, in recent interviews, said that the U.S. has a plan to keep the strait open in the event of a crisis. However, President Obama, who is now vacationing in Hawaii, has yet to comment on Iran’s latest move, and a White House spokesman said there will be no comment on the Iranian threat.

Just the threat of blocking access to the Strait of Hormuz may have been calculated to cause a spike in oil prices as a warning to American trading partners against joining the new sanctions, which the U.S. Senate passed by a rare 100-0 vote. Oil rose above $100 a barrel after the threat was issued.

The International Atomic Energy Agency published a report last month that for the first time laid out evidence that Iran may be secretly working to design a nuclear warhead, which the country has repeatedly denied. In the wake of the IAEA 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.

Over the last five years, the U.S. has implemented increasingly severe sanctions in an attempt to force Iran’s leaders to reconsider the suspected nuclear weapons program, but until now, has deliberately stopped short of targeting oil exports, which finance as much as half of Iran’s budget. But now the U.S. 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 make it difficult for those doing business with Iran’s central bank to also conduct financial transactions with the U.S., a step so severe that one of Obama’s top national security aides said two months ago that it was a “last resort.” The administration raced to put some loopholes in the legislation ahead of the Senate vote in hopes of reducing the impact on close allies who have signed on to pressuring Iran. The legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security.

The administration will have to bring to the market new sources of oil to ensure that global prices do not rise sharply. David S. Cohen, treasury under secretary for terrorism and financial intelligence, oversees the administration of the sanctions, and says that the American effort is more subtle than simply cutting of Iran’s ability to export oil, a step that would immediately send oil prices through the roof, which would only give Iran more money to fuel its nuclear ambitions.

Instead, the administration will aim to reduce Iran’s oil revenue by diminishing the volume of sales and forcing Iran to give its customers a discount on the price of crude. But analysts at investment banks are already warning of the possibility of rising gasoline prices in 2012 due to the new sanctions, despite the administration’s efforts to avoid such a reaction.

Since Obama’s first month in office, his aides have been talking to Saudi Arabia and other major oil suppliers about increasing their production, and about guaranteeing sales to countries that Iran now counts among its biggest customers, including China. However, it is as yet unclear whether the Saudis will be able to fill the gap left by Iran, and the U.S. is looking to countries like Iraq and Angola to increase production as well.

“The only strategy that is going to work here is one where you get the cooperation of oil buyers,” said Michael Singh, managing director of the Washington Institute for Near East Policy. “You could imagine the Europeans, the Japanese, and the South Koreans cooperating, and then China would suck up all of the oil that was initially going to everyone else.”

Whether the sanctions, even if successful at lowering Iran’s oil revenue, would force the government to give up its nuclear ambitions is unclear, but the Iranian leadership is clearly concerned. Iranian currency is already plummeting in value against the dollar, and there are rumors of bank runs.

“Iran’s economic problems seem to be mounting and the whole economy is in a state of suspended expectation,” said Abbas Milani, director of Iranian studies at Stanford University. “The regime keeps repeating that they’re not going to be impacted by the sanctions. That they have more money than they know what to do with. The lady doth protest too much.”

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

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