1.
IRAN THREATENS TO BLOCK OIL SHIPMENTS, AS U.S. PREPARES SANCTIONS
By David E. Sanger and Annie Lowrey
New York Times
December 27, 2011
Page A1
http://www.nytimes.com/2011/12/28/world/middleeast/iran-threatens-to-block-oil-route-if-embargo-is-imposed.html?ref=global-home
WASHINGTON -- A senior Iranian official on Tuesday delivered a sharp threat in response to economic sanctions being readied by the United States, saying his country would retaliate against any crackdown by blocking all oil shipments through the Strait of Hormuz, a vital artery for transporting about one-fifth of the world’s oil supply.
The declaration by Iran’s first vice president, Mohammad-Reza Rahimi, came as President Obama prepares to sign legislation that, if fully implemented, could substantially reduce Iran’s oil revenue in a bid to deter it from pursuing a nuclear weapons program.
Prior to the latest move, the administration had been laying the groundwork to attempt to cut off Iran from global energy markets without raising the price of gasoline or alienating some of Washington’s closest allies.
Apparently fearful of the expanded sanctions’ possible impact on the already-stressed economy of Iran, the world’s third-largest energy exporter, Mr. Rahimi said, “If they impose sanctions on Iran’s oil exports, then even one drop of oil cannot flow from the Strait of Hormuz,” according to Iran’s official news agency. Iran just began a 10-day naval exercise in the area.
In recent interviews, Obama administration officials have said that the United States has developed a plan to keep the strait open in the event of a crisis. In Hawaii, where President Obama is vacationing, a White House spokesman said there would be no comment on the Iranian threat to close the strait. That seemed in keeping with what administration officials say has been an effort to lower the level of angry exchanges, partly to avoid giving the Iranian government the satisfaction of a response and partly to avoid spooking financial markets.
But the energy sanctions carry the risk of confrontation, as well as economic disruption, given the unpredictability of the Iranian response. Some administration officials believe that a plot to assassinate the Saudi ambassador to the United States -- which Washington alleges received funding from the Quds Force, part of the Iranian Revolutionary Guards Corps -- was in response to American and other international sanctions.
Merely uttering the threat appeared to be part of an Iranian effort to demonstrate its ability to cause a spike in oil prices, thus slowing the United States economy, and to warn American trading partners that joining the new sanctions, which the Senate passed by a rare 100-0 vote, would come at a high cost.
Oil prices rose above $100 a barrel in trading after the threat was issued, though it was unclear how much that could be attributed to investors’ concern that confrontation in the Persian Gulf could disrupt oil flows.
The new punitive measures, part of a bill financing the military, would significantly escalate American sanctions against Iran. They come just a month and a half after the International Atomic Energy Agency published a report that for the first time laid out its evidence that Iran may be secretly working to design a nuclear warhead, despite the country’s repeated denials.
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.
For five years, the United States has implemented increasingly severe sanctions in an attempt to force Iran’s leaders to reconsider the suspected nuclear weapons program, and answer a growing list of questions from the IAEA. But it has deliberately stopped short of targeting oil exports, which finance as much as half of Iran’s budget.
Now, with its hand forced by Congress, the administration 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 effectively make it difficult for those who do business with Iran’s central bank to also conduct financial transactions with the United States. The step was so severe that one of President 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 final legislation so that it could reduce the impact on close allies who have signed on to pressuring Iran.
The legislation allows President Obama to waive sanctions if they cause the price of oil to rise or threaten national security.
Still, the new sanctions raise crucial economic, diplomatic, and security questions. Mr. Obama, his aides acknowledge, has no interest in seeing energy prices rise significantly at a moment of national economic weakness or as he intensifies his bid for re-election -- a vulnerability the Iranians fully understand. So the administration has to defy, or at least carefully calibrate, the laws of supply and demand, bringing to market new sources of oil to ensure that global prices do not rise sharply.
“I don’t think anybody thinks we can contravene the laws of supply and demand any more than we can contravene the laws of gravity,” said David S. Cohen, who, as treasury under secretary for terrorism and financial intelligence, oversees the administration of the sanctions. But, he said, “We have flexibility here, and I think we have a pretty good opportunity to dial this in just the right way that it does end up putting significant pressure on Iran.”
The American effort, as described by Mr. Cohen and others, is more subtle than simply cutting off Iran’s ability to export oil, a step that would immediately send the price of gasoline, heating fuel, and other petroleum products skyward. That would “mean that Iran would, in fact, have more money to fuel its nuclear ambitions, not less,” Wendy R. Sherman, the newly installed under secretary of state for political affairs, warned the Senate Foreign Relations Committee earlier this month.
Instead, the administration’s aim is 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.
Some economists question whether reducing Iran’s oil exports without moving the price of oil is feasible, even if the market is given signals about alternative supplies. Already, analysts at investment banks are warning of the possibility of rising gasoline prices in 2012, due to the new sanctions by the United States as well as complementary sanctions under consideration by the European Union.
Since President Obama’s first months in office, his aides have been talking to Saudi Arabia and other oil suppliers about increasing their production, and about guaranteeing sales to countries like China, which is among Iran’s biggest customers. But it is unclear that the Saudis can fill in the gap left by Iran, even with the help of Libyan oil that is coming back on the market. The United States is also looking to countries like Iraq and Angola to increase production.
Daniel Yergin, whose new book, *The Quest*, describes the oil politics of dealing with states like Iran, noted in an interview that “given the relative tightness of the market, it will require careful construction of the sanctions combined with vigorous efforts to bring alternative supplies into the market.” He said that it would “add a whole new dimension to the debate over the Keystone XL pipeline,” the oil pipeline from Canada to the United States that the administration has sought to delay.
“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.”
A broader question is whether the sanctions -- even if successful at lowering Iran’s oil revenue -- would force the government to give up its nuclear ambitions.
One measure of the effects, however, is that the Iranian leadership is clearly concerned. Already the Iranian currency is 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.”
2.
Analysis
SABER-RATTLING IN STRAIT OF HORMUZ
By Tim Lister
CNN
December 28, 2011
http://www.cnn.com/2011/12/28/world/meast/iran-hormuz/index.html
It is just 34 miles (55 kilometers) wide and dotted with islands and rocky outcrops, a channel that links the Persian Gulf with the Indian Ocean. Like many marine "chokepoints," the Strait of Hormuz has long commanded the attention of empires and their navies.
And in recent decades it has become even more critical: one-third of the oil carried by sea passes through Hormuz -- that's some 15 million barrels every day, according to the U.S. Energy Information Administration.
Now Iran's Vice-President is warning that the Islamic Republic could block the Strait if sanctions are imposed on its exports of crude. France, Britain, and Germany have proposed such sanctions as punishment for Iran's lack of co-operation on its nuclear program.
To demonstrate its intent, Iran is holding a 10-day military exercise in an area from the eastern part of the Strait out into the Arabian Sea, with some elements playing the part of enemy forces. Western diplomats describe the maneuvers as further evidence of Iran's volatile behavior, following the occupation of the British embassy in Tehran. And it's not the first time Iran has used this vital sea lane in a high-stakes game of brinkmanship.
The Strait is thought to have been named for the Persian Hur-mogh, the date-palm found on the coast. It was mentioned in a first century mariners' account, *The Periplus of the Erythtraean Sea*, and down the ages was known for its pearls.
IRAN'S MILITARY MIGHT IN IRAQ
But as oil became the lubricant of the world economy, the Strait of Hormuz -- and the sea lanes leading to it -- became a geo-strategic flashpoint. So narrow is the Strait, with sea-lanes just two miles wide heading in and out of the Gulf, ships must pass through Iranian and Omani territorial waters. In addition, Iran and the United Arab Emirates dispute sovereignty over several islands close to the Strait.
Iran last tried to disrupt and sabotage Gulf shipping during its decade-long conflict with Iraq, when the Arab Gulf states were funding Saddam Hussein's war effort. When Iraq began attacking Iranian tankers in 1984, Iran responded by targeting vessels headed to and from Gulf ports. And it began a guerrilla war at sea -- laying mines in shipping lanes.
That led the U.S. to provide military escorts for Kuwaiti shipping. In 1988, an Iranian mine damaged and nearly sank the USS Samuel B. Roberts, prompting U.S. President Ronald Reagan to order retaliatory strikes against Iranian oil platforms and naval vessels. Two platforms -- Sirri and Sassan -- were destroyed and an Iranian warship sunk in Operation Praying Mantis.
Since then, the U.S. has increased co-operation with the navies of Gulf Arab states and established the headquarters of the U.S. Fifth Fleet in Bahrain.
But Iran's neighbors understand that their reliance on the Strait to transport oil and liquefied natural gas remains vulnerable. According to U.S. diplomatic cables, Iraqi Prime Minister Nouri al-Maliki said in December 2009 that "Iraq would be the hardest hit" if tensions led Iran to try to blockade the Strait. Kuwaiti official have suggested building a 1,000-mile land pipeline to the Gulf of Oman to reduce reliance on the maritime route.
Today, after decades of sanctions, Iran does not have the naval power to block the Strait, and its ageing air force would be no match for U.S. and Gulf fighter jets. But military experts say Iran could wage "asymmetrical warfare" -- involving mines and attacks by Revolutionary Guards' patrol boats. It has also developed a class of small submarines, three of which were launched last month, according to the Iranian naval commander quoted by the Fars news agency.
Even bellicose language from Iranian politicians has already caused jitters in oil markets. Earlier this month an Iranian legislator, Parviz Sarvari, warned: "Soon we will hold an exercise on closing the Strait of Hormuz. If the world wants to make the region insecure, we will make the world insecure."
Any attempt to interfere with shipping would be a double-edged sword for Tehran. Iran also relies on the Strait to export its crude and other products, and has to import most of its refined gasoline for lack of refining capacity. The U.S. State Department says there is "an element of bluster" in the Iranian threats.
Even so, analysts worry that the deterioration in U.S.-Iranian relations could magnify the consequences of a collision or provocation in the Gulf. Shortly before retiring as Chairman of the U.S. Joint Chiefs of Staff, Admiral Mike Mullen said: "If something happens, it's virtually assured that we won't get it right, that there will be miscalculations which would be extremely dangerous in that part of the world."
Trita Parsi, President of the National Iranian American Council, told CNN Monday that an incident in the Strait "could spark a wider war precisely because there's no communication, no diplomacy, and no de-escalatory mechanisms between the United States and Iran."
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