Iran-US Tensions Rise, So Do Oil Prices

Iran’s parliament yesterday introduced a bill that would direct the country’s military forces to block shipments of crude oil through the Strait of Hormuz if the destination of the shipment is one of the countries that has signed on to the US-led embargo of Iranian oil. The legislation is still being debated and it remains uncertain exactly how Iran would enforce such a law.

For its part, the US has responded by increasing the number of ships now patrolling the seas near the Strait. A report in Al Arabiya says the US Navy now has eight minesweepers in the region plus added numbers of F-22 Stealth fighter plans and older F-15C fighters at land bases in the region. The paper cites a senior defense department spokesman:

Don’t even think about closing the strait. We’ll clear the mines. Don’t even think about sending your fast boats out to harass our vessels or commercial shipping. We’ll put them on the bottom of the Gulf.

The proposed Iranian legislation and the tough talk from the US have pushed up crude oil prices today in electronic trading. Brent crude was trading at $99.79/barrel, up nearly 2.5% on the ICE this morning, while WTI climbed 2.7% to $86.06/barrel. WTI closed on the Nymex at $83.75/barrel last night, off -1.4% for the day.

Part of the increase is due to the apparent agreement on how the Eurozone will deal with its banking crisis, but a bigger portion of the rise is the result of the escalating tensions between the US and Iran over the Islamic Republic’s nuclear development program.

The late-June talks between the P5+1 and Iran in Moscow achieved nothing except another agreement to talk some more back in Istanbul beginning today. That isn’t much, but some observers see the consistency of the recent talks as a positive sign.

Iranian political analyst Mohammad Ali Shabani and Seyed Hossein Mousavian, a former member of Iran’s nuclear negotiating team, have written in The National Interest that the economic sanctions against Iranian oil have not led the country’s economy anywhere near collapse. The EU embargo, which officially began last Sunday, has effectively been in place for six months, and given all the waivers the US has granted, as well as Iran’s success at hiding its shipments, the Iranian economy is crippled but nowhere near fatally injured.

Iranian citizens do not believe that the US and Europe are negotiating in good faith, with a goal of removing the sanctions. Iran believes that the only weapon the US has left is military action and that weapon will not be unleashed. In other words, Iran believes it is winning. Again, Shabani and Mousavian:

Bottom line: the Islamic Republic is willing to agree on a face-saving solution that would induce it to give up the cards it has gained over the past years.

… For the forthcoming talks on July 3, the P5+1 should prepare a comprehensive list of all possible measures guaranteeing that Iran will agree to a maximum level of transparency and cooperation with the IAEA, ensuring that there is no breakout capability and that it will remain a nonnuclear weapon state forever. In exchange, the P5+1 should recognize Iran’s legitimate rights for enrichment and agree to gradually remove sanctions.

Chances of this happening are pretty slim in an election year. The terms laid out here will strike US voters as appeasement. That is not the path to electoral victory.

Far more likely is that the negotiations will continue until after the US elections as they have for the past few months. Crude oil prices will remain volatile as traders react to every whiff of news from the Persian Gulf. But the reality is that neither side wants to fire the first live bullet.

Paul Ausick