US Warns Iran Not to Close Strait of Hormuz

Associated Press + More

Instead, the administration believes Iran is playing the only card it has left: issuing threats and attempting to shift focus away from its own behavior.

U.S. officials have not said whether there is a concrete response plan in place should Iran seek to block the Strait. But the administration has long said it is comfortable with the U.S. Naval presence in the region, indicating that the U.S. could respond rapidly if needed.

The White House has been largely silent on Iran's threat, underscoring the administration's belief that responding at the White House level would only encourage Iran.

While many analysts believe that Iran's warnings are little more than posturing, they still highlight both the delicate nature of the oil market, which moves as much on rhetoric as supply and demand fundamentals.

Iran relies on crude sales for about 80 percent of its public revenues, and sanctions or even a pre-emptive measure by Tehran to withhold its crude from the market would already batter its flailing economy.

IHS Global Insight analyst Richard Cochrane said in a report Wednesday that markets are "jittery over the possibility" of Iran's blockading the strait. But "such action would also damage Iran's economy, and risk retaliation from the U.S. and allies that could further escalate instability in the region."

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"Accordingly, it is not likely to be a decision that the Iranian leadership will take lightly," he said.

Earlier sanctions targeting the oil and financial sector added new pressures to the country's already struggling economy. Government cuts in subsidies on key goods like food and energy have angered Iranians, stoking inflation while the country's currency steadily depreciates.

The impetus behind the subsidies cut plan, pushed through parliament by Iranian President Mahmoud Ahmadinejad, was to reduce budget costs and would pass money directly to the poor. But critics have pointed to it as another in a series of bad policy moves by the hardline president.

So far, Western nations have been unable to agree on sanctions targeting oil exports, even as they argue that Iran is trying to develop a nuclear weapon. Tehran maintains its nuclear program — already the subject of several rounds of sanctions — is purely peaceful.

The U.S. Congress has passed a bill that penalizes foreign firms that do business with the Iran Central Bank, a move that would heavily hurt Iran's ability to export crude. European and Asian nations use the bank for transactions to import Iranian oil.

President Barack Obama has said he will sign the bill despite his misgivings. China and Russia have opposed such measures.

Sanctions specifically targeting Iran's oil exports would likely temporarily spike oil prices to levels that could weigh heavily on the world economy.

Closing the Strait of Hormuz would hit even harder. Energy consultant and trader The Schork Group estimated crude would jump to above $140 per barrel. Conservatives in Iran claim global oil prices will jump to $250 a barrel should the waterway be closed.

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By closing the strait, Iran may aim to send the message that its pain from sanctions will also be felt by others. But it has equally compelling reasons not to try.

The move would put the country's hardline regime straight in the cross-hairs of the world, including nations that have so far been relative allies. Much of Iran's crude goes to Europe and to Asia.

"Shutting down the strait ... is the last bullet that Iran has and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia," said analyst Olivier Jakob of Petromatrix in Switzerland.

Iran has adopted an aggressive military posture in recent months in response to increasing threats from the U.S. and Israel of possible military action to stop Iran's nuclear program.

The Iranian navy's exercises, which began on Saturday, involve submarines, missile drills, torpedoes and drones. A senior Iranian commander said Wednesday that the country's navy is also planning to test advanced missiles and "smart" torpedoes during the maneuvers.