The Strait of Hormuz is a navigable channel of water located in the Persian Gulf between Iran and Musandam, an exclave of Oman, and surrounded also by many of the most important oil exporters in the world, including Saudi Arabia and Iraq. Its history is not short of conflicts – in 1988, U.S. Navy Operation Praying Mantis sank 5 Iranian ships, killing over 50 crew. In 2008 tensions rose again between the two countries, without further escalation.

The current crisis, which started at the end of 2011 and again involved the U.S. and Iran, but with another key actor, the European Union – is a development of the diplomatic issue around the Iranian Nuclear Program. Iran’s apparent unwillingness to cooperate in regarding this issue, which it affirms to exist solely for peaceful purposes, prompted talks of further sanctions on the Iranian economy, that is to say, a full-fledged oil imports ban. Iran’s government responded swiftly and boldly, affirming that such a ban would cause it to close the Strait and also that it didn’t have the habit of warning twice.

The possibility of closing Hormuz stirred serious tensions between the actors involved, increasing an already very difficult scenario. The United States, worried with the economic consequences of Iran’s threat, made military movements close to the Iranian borders. In the same way, Iran reacted by provoking through; also relying on its military forces, supposedly with no bellicose intentions.

On January 2012 the European Union agreed to an embargo on Iranian oil in spite of the hard talk by Ahmadinejad’s government. Iran’s response was to undertake an immediate oil delivery halt to five EU countries – namely, France, Italy, Greece, Netherlands and Spain. The country’s failure to live up to its threats stirred questions about the extension of its power to do so. Nevertheless, must Iran really close the full strait in order to derive political power from its geographical asset? What would be the consequences of a choice to use such an asset?

According to a 2005 study by the International Monetary Fund (IMF) on the structure of oil markets, the crude oil price does reflect market fundamentals. Nevertheless, the study affirms that “given that only about 5 percent of futures contracts are ever delivered as a physical product, increased uncertainty can encourage speculative behavior in the futures market. This, in turn, may push up futures prices beyond that warranted by future market fundamentals”.

This is to say that agent expectations can, and in fact do, affect oil prices, especially longer-dated futures prices which, according to the same IMF document, respond more to daily oil market news. Besides that, the flow through the Strait is most definitely part of the market fundamentals, since “roughly 35 percent of all seaborne traded oil, or almost 20 percent of oil traded worldwide”, which means that any conflict in the region which caused the partial or total blockade of oil supply, be it for deliberate blocking or by insecurity reasons, would cause the prices to soar in no time.

Such an increase in oil prices is not necessarily tied to a partial or total blockade on the Strait. On late February 2012, insecurity in the region due to a possible escalate of the conflict between one or more of the parties to the affair pushed up the oil barrel prices up to a maximum in nine months, with the Brent barrel valued in over $120 in London.

According to a very recent IMF study, a document about global economic prospects and policy changes made for the meeting of G-20 deputies in 2012, “a halt of Iran’s exports to OECD economies without offset from other sources would likely trigger an initial price increase of around (…) $20-$30 a barrel”. This in itself is a major strike to the world economy. The report goes on, though: “A Strait of Hormuz closure could trigger a much larger price spike, including by limiting offsetting supplies from other producers in the region”.

Considering the global oil demand in 2011 to have been 83.9 million barrels a day, according to the International Energy Agency 2011 medium-term oil&gas markets overview, a sustained $30 rise in the price of the oil barrel can certainly lead to increased world spending on oil being counted in hundreds of billions of dollars.

The only safe bet regarding predictions to a scenario with this amount of extra spending is that it will be a sharp blow to the world economy – especially in a world still in the process of recovering from the last economic depression. What could happen if there is an actual closure of the Strait and the prices rise as predicted by the IMF? What could happen to an Europe still on the brink of collapse to see its main energy energy source get 20-30% expensive almost overnight? Obviously, the closed passageway would be again reopened one day – by diplomacy or by force – and the prices would return to reflect the ordinary configuration of the energy market. The resources lost in the spike, however, won’t be recovered so soon.

Negotiations are still ongoing, but debates about a possible war against Iran are becoming more widespread. Without trying to establish a sound causal relationship, which would need a much more extensive econometric and statistical research, it is probably not unwarranted to say that there is possibly a connection between the rise in oil prices, from an average of $22.81 in 2002 to an average of $60.12 in the subsequent years, up to 2011, and the wars that the region has hosted.

The stakes are high; the best possible outcome would be a negotiated via media with Iran, but in order to calm down the situation definitely, this would mean a strong ascertain that it does not pursues nuclear weaponry; if conflict continues to escalate, Iran will need to decide whether or not to forsake this objective in order to avoid war. Israel’s role in the situation is pivotal: if it decided to open up its own nuclear program, this would be a key negotiation asset not only in issues with Iran but with the whole of the Middle East. As showed in the previous paragraphs, the whole world has many reasons to watch closely this decision and the future of this situation.

Bibliography

Berkmen, Pelin; Ouliaris, Sam; Samiei, Hossein. The Structure of the Oil Market and Causes of High Prices. Accessed February 20, 2012. http://www.imf.org/external/np/pp/eng/2005/092105o.htm#2

International Monetary Fund. Global Economic Prospects and Policy Changes. Accessed February 20, 2012. http://www.imf.org/external/np/g20/pdf/012012.pdf

http://www.ioga.com/Special/crudeoil_Hist.htm

http://www2.valoronline.com.br/empresas/2536644/ira-faz-preco-do-petroleo-bater-no-maior-nivel-em-nove-meses , accessed in Feb 20th, 2012

U.S. Energy Information Administration – World Oil Transit Chokepoints. Available at: <http://205.254.135.7/countries/regions-topics.cfm?fips=WOTC>, accessed in Feb 19th, 2012.

Henrique Fialho Barbosa é aluno de graduação em Relações Internacionais na Universidade de Brasília, ex-membro do Programa de Educação Tutorial em Relações Internacionais – PET/SESU/MEC e membro do Grupo de Análise e Prevenção de Conflitos Internacionais – GT Brasília.(henriquefb@gmail.com)

Jasmim Gehlen Madueño é aluna de graduação em Relações Internacionais na Universdade de Brasília. (jasmim.madueno@gmail.com)

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