When it comes to Iran and its threat to close the Strait of Hormuz, the United States might only have two options: war or higher oil prices. And while one analyst believes war may actually be cheaper, this hardly seems like a preferable alternative to an increase in oil prices.
But before we go any further, a brief review is in order. The following statement is from Agence France Presse:
No oil will be permitted to pass through the key oil transit Strait of Hormuz if the West applies sanctions on Iran’s oil exports, Iranian Vice President Mohammad Reza Rahimi warned on Tuesday.
The threat was reported by the state news agency IRNA as Iran conducted navy wargames near the Strait of Hormuz, at the entrance of the oil-rich Gulf.
“If sanctions are adopted against Iranian oil, not a drop of oil will pass through the Strait of Hormuz,” Rahimi was quoted as saying.
“We have no desire for hostilities or violence… but the West doesn’t want to go back on its plan” to impose sanctions, he said.
“The enemies will only drop their plots when we put them back in their place,” he said.
Translation: if the U.S. attempts to impose sanctions on Iran for advancing its nuclear program, Iran will sever a vital artery for transporting massive amounts of the world’s oil supply.
[Editor’s note: Of course, if Iran abandoned the idea of annihilating Israel and discontinued its nuclear weapons programme, the U.S. wouldn’t be threatening to impose sanctions. But keep in mind that it’s not the aim of this article to discuss the “right” or “wrong” of American intervention in Iran’s pursuit of nuclear power. We’ll save that debate for a different day. The purpose of this article is to discuss the possibility of Iran closing a critical trading route and America’s likely response.]
John Ransom of Townhall explains the implications of Iran closing the strait:
According to the Center for Strategic and International Studies, 40 percent of the world’s oil supply, or 17 million barrels per day, travels through the Strait of Hormuz. And while alternate routes can be found to ship oil, the alternate routes can only carry about one-third of the oil that would normally go through the Straits or about 5 million barrels per day. The supply deficit would be about 12 million barrels per day- or two thirds of the entire daily demand by the United States of about 18-19 million barrels.
If Iran keeps its promise and cuts off an estimated 12 million barrels of oil per day, don’t be surprised if the price of crude approaches (or surpasses) $250-300 per barrel.
Recall that because of the civil war in Libya, Brent North Sea Crude went from about $95 per barrel in February and peaked at about $125 before settling down to its current spot price of around $108. And that was only 1 million barrels of oil supply per day taken out of circulation
Now imagine if Iran actually closes the strait. What does this mean?
9 million barrels at $250 per barrel comes to about $2.2 billion per day. If you add a similar increase to domestic prices, you can add another $2 billion per day to the energy costs of the country or about 30 percent of our entire current GDP, which of course would shrink dramatically.
If oil prices rise even a fraction of the scenario that I have sketched out, that won’t just be economic stagflation as we witnessed starting in the spring, that’ll be economic implosion of the worst order. Think of inflation in the mid-to-high teens and unemployment shooting straight up past ten percent nationally.
That’s a best-case scenario. It could produce a world-wide Weimar Republic, with hyper-inflation; the last straw of the banking system that we have in place right now, which not coincidentally is made mostly of straw.
How can the U.S. avoid this type of economic disaster?
In the past, the U.S. has relied on the Navy’s 5th Fleet to keep the strait open rather than see the price of oil skyrocket. However, this may not be as easy or financially feasible as it was in the past.
“[This] isn’t 1987 or 1990. The stakes are pretty high with instability in the Gulf states…especially after America left Iraq with a power vacuum,” Ransom points out. “Look for Iran to press its advantage because they have boots on the ground and we do not.”
Indeed, if this is more than just saber-rattling and Iran is serious about closing the strait, it would seem the U.S. only has two options: take up arms against Iran or suffer the economic consequences.
If the U.S. decides to make a show of force, it could turn into a war on land in Syria, Lebanon and Egypt if not Saudi Arabia, Bahrain and Kuwait “with the U.S. on one side and Iran on the other.” America is in no position to finance a military operation of this magnitude. Moreover, and most importantly, nobody wants to go to war for oil.
However, the apparent alternative to armed conflict — to allow Iran to close the strait — is wholly unacceptable. With global markets already precariously balanced on the edge of collapse, many national economies would not be able to endure the absence of the high-demand commodity.
A handful of analysts have mentioned that the United States could temporarily fulfill its energy needs, and possibly avoid economic implosion, by tapping into its oil reserves. Although this is a definite possibility, one must remember that Europe does not have the luxury of an oil reserve safety net.
“Many EU nations have few natural resources at all. This makes them net importers of expensive commodities, which include oil and agricultural products,” writes Douglas A. McIntyre of 24/7 Wall St. “These resources are not just expensive, they are also subject to sharp price increases, as commodity inflation earlier this year showed.”
He explains further:
The U.S. ranks seventh in the world in proven oil reserves, with 98 billion barrels. The EU ranks 24th with 5.1 billion — and the top country in continental Europe, based on national reserves, is Italy with 476 million barrels…the U.S. has a much greater ability to weather periods of tight commodity supplies or rapidly rising prices than countries within the EU.
Therefore, while America’s economy might be able to cope — albeit temporarily — with a sharp decrease in global oil supply, the EU’s would not. Europe’s already disastrous economic situation would be further exacerbated by an energy crisis and it would most likely result in total economic breakdown. And as discussed earlier on The Blaze, if the eurozone suffers a collapse, the consequences for the U.S. economy could be severe.
What is to be done?
On the one hand, the U.S. cannot afford for Iran to put a chokehold on the world’s oil supply. But on the other hand, the U.S. is in no position to finance a multinational war (not to mention the fact that another war in that region, especially one fought over trade routes, would be remarkably unpopular).
There’s got to be another way.
It would seem that the solution lies in energy independence. More than ever before, the U.S. must look for ways to scale back its addiction to foreign oil. Unless the United States enjoys being subjected to the threats and whims of oftentimes hostile nations, especially ones that are feverishly engaged in what appears to be the development of nuclear weapons, it must invest in the cultivation of its own natural resources.
If America fails to do this, and the country continues to rely on belligerent sovereigns to fulfill its energy needs, it will keep getting itself into situations where it has to ask: “Would I rather stab myself in the eye or shoot myself in the foot?”
[Editor’s note: This article, including its headline, has been updated for clarity.]