Anand B.A., B.L

America warned Iran on 28/12/11 that it will not tolerate a blockade of an oil shipping route and would “counter malevolent actions”.

Iran’s Admiral Habibollah Sayyari had said Iran had the power to close the Strait of Hormuz in response to ­potential sanctions over its nuclear ambitions.

The trade route is the only sea outlet for the crucial oil fields in and around the Persian Gulf. The comments drew a quick response from the US. “This is not just an important issue for security and stability in the region, but is an economic lifeline for countries in the Gulf, to include Iran,” Pentagon press secretary George Little said.

“Interference with the transit or passage of vessels through the Strait of Hormuz will not be tolerated.”

Separately, a Bahrain-based US Navy 5th Fleet spokeswoman said the Navy is “always ready to counter malevolent actions to ensure freedom of navigation”.

Iran’s threat to seal off the Gulf, surrounded by oil-rich Gulf States, underlines the depth of worry over the prospect that the Obama administration will go ahead with sanctions over its nuclear programme that would severely hit its biggest revenue earner, oil.

The sanctions themselves have raised worries that removing Iran’s crude from the market will lead to a spike in oil prices.

Gulf Arab nations appeared ready to at least ease market tensions. A senior Saudi Arabian oil official said that Gulf Arab nations are ready to step in to offset any potential loss of exports from Iran, which is the world’s fourth largest oil producer.

What remains unclear is what routes the Gulf nations could take to bring that production to market if Iran goes through with its threats.

About 15 million barrels per day pass through the Hormuz Strait, according to the US Energy Information Administration.

There are some pipelines that could be tapped, but Gulf oil leaders, who met in Cairo on December 24, 2011 declined to say whether they had discussed alternate routes or what they may be.
The Saudi comment, however, appeared to allay some concerns. The US benchmark crude futures contract fell 77 cents in early morning trade on the New York Mercantile Exchange, but still hovered above 100 dollars per barrel.

US State Department spokesman Mark Toner played down the Iranian threats as “rhetoric,” saying, “We’ve seen these kinds of comments before.”

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

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 programme – already the subject of several rounds of sanctions – is purely peaceful.

The US Congress has passed a bill banning dealings with the Iran Central Bank, a move that would damage Iran’s ability to export crude.

Purpose for Imposition of Sanction

The U.S. Senate unanimously approved a measure to sanction the Central Bank of Iran, a move intended to shrink Iran’s oil exports and deprive it of cash that might be used in nuclear or missile programs.

The Senate measure would give the Obama administration power to bar foreign financial institutions that do business with the central bank from having correspondent bank accounts in the U.S. If enacted, it could be much harder for foreign companies to pay for oil imports from Iran, the world’s third largest exporter of the commodity.

“The Central Bank of Iran has become a vital intermediary for purchasers of Iranian crude because existing sanctions against the Persian Gulf country have constrained Iran’s ability to access the international financial sector to settle oil trades,” said Mark Dubowitz, director of the Iran Energy Project at the Foundation for Defense of Democracies in Washington.

The Obama administration opposed the amendment on the grounds that by targeting an important oil supplier for Asia and Europe, the move threatens to fracture the international coalition supporting coordinated pressure on Iran and may send oil prices soaring if world supply is perceived to be in jeopardy.

“There’s absolutely a risk” that “the price of oil would go up, which would mean that Iran would, in fact, have more money to fuel its nuclear ambitions, not less,” Undersecretary of State Wendy Sherman told the Senate Foreign Relations Committee, before lawmakers voted.

Oil prices have increased 9.8 percent this year to trade at $100.37 a barrel on the New York Mercantile Exchange today.

Final Bill

The measure, sponsored by Senators Mark Kirk, an Illinois Republican, and Robert Menendez, a New Jersey Democrat, was an amendment to the 2012 defense authorization bill, also passed, which sets Pentagon policy and spending targets. The House and Senate will need to negotiate a final bill that would go to President Barack Obama for his signature.

The aim of the sanctions, its sponsors said, is to deprive Iran of revenue and thereby force the regime to abandon nuclear- weapons work. On Nov. 8, a report by the United Nations’ International Atomic Energy Agency highlighted evidence of clandestine work, which Iran denied.

Oil is Iran’s major source of income, supplying over 50 percent of the national budget, according to International Monetary Fund figures. It provided the Islamic state $56 billion in the first seven months of 2011, according to the U.S. Energy Department.

Undermine Support

U.S. Undersecretary of Treasury David Cohen testified before the Senate Foreign Relations Committee yesterday that taking unilateral action against the Central Bank of Iran is likely to undermine support for multinational sanctions that the U.S. has worked hard to garner.

Hours before the Senate action yesterday, the European Union added 180 Iranian officials and companies to a blacklist and debated further measures that may be enacted next month. On Nov. 21, the U.K., Canada and the U.S. announced expanded sanctions aimed at Iran’s banking system.

While China has supported four rounds of UN sanctions on Iran, leaders in Beijing as well as a number of U.S. allies in Asia and Europe who buy Iranian oil have so far resisted targeting the nation’s energy products.

The top refiners of Iranian oil are China, Japan, India, Italy and South Korea, according to the U.S. Energy Information Administration.

Greece’s Difficulties

Greece “has a certain number of reservations” about an Iranian oil cutoff, French Foreign Minister Alain Juppe told reporters at an EU foreign ministers’ meeting in Brussels yesterday. “We have to take account of them and work with the different partners so that the interruption of Iranian deliveries can be offset by higher production in other countries,” he said.

Coordinated pressure on Iran is more effective than unilateral action, which can be more easily evaded, Cohen said. “It is imperative that we act in a way that does not threaten to fracture the international coalition” and “does not inadvertently redound to Iran’s economic benefit” through higher oil prices, Cohen testified at the Senate.

Iran pumped 3.6 million barrels of oil a day last month, a Bloomberg survey showed, and exported an average 2.58 million barrels a day in 2010, according to Organization of Petroleum Exporting Countries statistics.

European Refiners

The Senate measure would come into effect July 1 if included in final legislation signed by Obama. It would permit the president to waive sanctions for national security reasons or because of insufficient oil supply to replace Iran’s crude.

The timing would allow the market to adapt while rising production from Libya and Iraq helps European refiners offset the loss of Iranian crude, Kirk said in a telephone interview.

“We intentionally put a delay in the language so markets could adjust,” he said.

Iran is the second-largest oil producer in the Organization of Petroleum Exporting Countries after Saudi Arabia. About 15.5 million barrels of oil a day, about a sixth of global consumption, flows through the Strait of Hormuz between Iran and Oman, according to the U.S. Department of Energy.

A U.S. business and trade association that represents more than 300 member companies expressed “deep disappointment” over the passage of the measure.

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