The looming oil terror

~ Iran could choke flow of oil to world in case of war - but it would hurt itself by doing so

VIENNA, Austria (AP) - Iran's potential to shut down nearly 40 percent of the world's oil trade represents a weapon possibly more powerful than its missiles, gunboats or any arms system Tehran claims to possess. But such a move would cut both ways in any possible military showdown with the United States.

The Islamic Republic's overwhelming dependence on revenue from its crude exports means it could end up suffering a sharp and self-inflicted blow if it turns off the spigots and blocks Persian Gulf supply lines. Oil remains near historic heights. And jittery markets jump at any sign that supplies could grow tighter, spiking at every hint of new tensions over Tehran's nuclear defiance.
But recent increases pale compared with the once-unthinkable levels that could be reached -- experts speak of up to US$200 (euro136) a barrel -- if Washington and Tehran move toward open conflict.

That scenario is kept alive by White House insistence that all options remain on the table to keep Iran from obtaining nuclear arms, despite indications from Pentagon leaders that there is no fast-track planning for another Middle East war. Iran insists its nuclear programme is only for energy purposes.

"The oil market is already psyched up because of Mideast tensions," says petroleum analyst John Hall, at John Hall Associates in London. "If an OPEC country like Iran is attacked for whatever reason, the market will go berserk. The oil price could head anywhere." Iran sells 2.5 million barrels of oil a day, making it OPEC's second-largest producer. Any decision by Tehran to yank that supply off the market would by itself propel prices steeply upward.

But Iran also could squeeze supplies even further by trying to choke off the Strait of Hormuz -- the narrow mouth of the Persian Gulf -- that serves as the transit route for more than 30 million barrels of oil a day, or nearly 40 percent of the world's supply. An additional daily 2 million barrels of oil products, including fuel oil, move through the strait, as well as tankers carrying liquefied natural gas.

Iran's supreme leader, Ayatollah Ali Khamenei, has threatened to shut the strait in response to U.S. military pressure. His naval commanders claim to have an array of high-tech weapons including a super-speed torpedoes and a sonar-evading, anti-ship missile.

U.S. military officials and independent experts are sceptical. Anthony Cordesman, of the Washington-based Centre for Strategic and International Studies, writes: "Iran has made so many grossly exaggerated claims about its weapons developments in the past that it seems they were designed more to try to deter U.S. military action and/or reassure the Iranian public."

Iran already has deployed anti-aircraft and anti-ship missiles on Abu Musa, an island near the strait's shipping lanes. With the USS Enterprise carrier battle group already in the region -- and Navy minesweepers and other support vessels ready for quick deployment --Cordesman estimates a full Iranian blockade could not last more than two weeks.

The passage was navigable during the 1984-87 "Tanker War" between Iran and Iraq, during which each side fired on the other's oil tankers -- and sometimes on foreign flagged ships. Still, the hostilities led to a 25 percent drop in shipping in the region and forced the U.S. to secure shipping lanes."The problem is not Iranian oil alone," said Michael Klare, author of "Blood and Oil: The Dangers and Consequences of America's Growing Petroleum Dependency."

"People can live with that for a while. The question is if -- and for how long -- Iran can disrupt the flow of oil from other countries." To accomplish that, Iran has weapons at hand beyond a Strait of Hormuz blockade that could account for serious cumulative damage. Tehran, for instance, could opt to use its suspected influence among Shiite militias in neighbouring Iraq. Sabotage of oil pipelines and facilities could cripple much of Iraq's oil exports, now at close to 2 million barrels a day.

With the world already consuming close to all the oil being produced, an Iranian and Iraqi shortfall approaching 4 million barrels a day would leave demand far outstripping supply. But Iran would also pay a hefty price if the petrodollars that now represent 80 percent of export revenues are reduced, potentially stirring civil unrest in a nation with an official unemployment rate of 14 percent - but which some analysts say could be far higher.

"They would shoot themselves in the foot," said Mustafa Alani, director of national security and terrorism studies at the Dubai-based Gulf Research Centre. "It's one thing to test the market psychology, it's another to take the actual step and stop oil exports."

The U.S. Department of Energy estimates oil exports finance about half of the Iranian government's budget. And while high oil prices have boosted the annual growth rate to about 5 percent, Iran's economy has weak spots from trade restrictions on sensitive technologies.

They include U.N. sanctions levied as a result of its refusal to halt uranium enrichment, decades of slowly tightening U.S. economic restrictions -- including tough new sanctions against Iran's military, banks and industries Washington imposed last month -- and reduced trade and financial links with Europe due to U.S. pressure.

Oil consuming nations, meanwhile, have at least one ace up their sleeves: crude reserves. The United States and other members of the International Energy Agency last year had a combined 1.48 billion barrels of oil in their emergency stocks. That's equivalent to about 600 days of Iran's net oil exports.

At close to 700 million barrels, U.S. strategic reserves alone are enough to make up for more than two months of total crude imports - and America depends on Middle East oil for only 15 percent of its needs. Still, a military strike on Iran would likely bring long-term consequences to the oil markets, said Frederic Lasserre, head of commodities research at Societe Generale in Paris.

Any U.S. attack "would reinforce the idea that geopolitics is deteriorating year after year," he said. "First it was Iraq, now Iran. People will ask which oil producing country will be next?"