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The Wall Street Journal: Crisis Sparks Oil-Supply Fear

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U.K.-Iran Standoff
Has Traders Pricing
In Risks of a Disruption
By MASOOD FARIVAR and IAN TALLEY
April 2, 2007; Page C3

As the standoff over Iran’s capture of British sailors drags on, oil traders are thinking more about one of the top nightmares for Western governments: an obstruction of oil traffic through the Persian Gulf.

Under the scenario, Iran, in a bid to pre-empt or respond to U.S. military action, closes the Strait of Hormuz, the Persian Gulf chokepoint through which 20% of the world’s oil supply passes. The consequence would be swift: By most experts’ reckoning, oil prices, which ended the week just below $66 a barrel, would soar to $100 and even higher, potentially plunging the world economy into a depression.

The scenario may sound extreme, but as the crisis over Iran’s seizure of 15 British sailors and marines enters a second week, fear of a major Persian Gulf oil-supply disruption is high on traders’ minds and is likely to remain a force supporting oil prices.

In the week since Iran captured the sailors, crude-oil futures on the New York Mercantile Exchange climbed nearly 7%, as traders priced in the increased risk of a disruption.

No Room for Comfort

“I don’t know if anyone really believes there will be a supply disruption,” said Tom Bentz, an analyst at BNP Paribas Futures in New York. “But the uncertainty is there that something could happen, so it makes it very difficult to get too comfortable in either direction. But the bigger risks still seem to be on the upside.”

The U.K.-Iran standoff comes as the U.S. is increasingly concerned about the Islamic republic because of Iran’s role in Iraq and its nuclear ambitions. The U.S., which recently sent a second aircraft carrier to the Persian Gulf, launched war games, further heightening tensions.

In this environment, the question of why Iran would choose to target forces from the U.S.’s closest military ally has become a subject of debate. While Iran claims the British sailors were illegally in its waters, analysts see the seizure as a show of force by Tehran or even a calculated move to draw the Western allies into a limited conflict.

“The Iranians are playing a very, very dangerous game,” said Bill Callahan, president of Unitel, a maritime security firm in New York. “It’s now a question of who is going to blink first. If this thing were to blow up over an incident, everything will be affected.”

Michael O’Hanlon, a senior fellow at Brookings Institution, said the likelihood of Iran blocking traffic through the strait is “very low, almost zero” at the moment.

Still, some fear that an aggressive move by the U.S. could lead Iran to block the oil-rich Strait of Hormuz. While Iranian officials say they have no such intention, last year Iran’s supreme leader, Ayathollah Ali Khamenei, warned that “if the Americans make a wrong move toward Iran, the shipment of energy will definitely face danger and the Americans would not be able to protect energy supply in the region.”

Iran does have the potential to disrupt shipping in the Gulf by laying mines in shipping lanes through the Hormuz.

“They have an impressive naval guerrilla-warfare capability,” said Mike Eisenstadt, a military-and-security expert at the Washington Institute for the Near East, a conservative-leaning think tank. “If the U.S. were not there, they could probably close the Strait of Hormuz should they desire.”

But with two aircraft-carrier groups in the Gulf, the U.S. has amassed its largest naval force in the region since the start of the 2003 Iraq invasion.
 
The U.S. Navy said its mission is to provide maritime security in the Gulf and described the presence of the carriers as a warning to “any country not to miscalculate our resolve to help provide security and stability in the region.”

U.S. Power

Officials have made all but clear that any Iranian attempt to block the Strait would be construed as a threat to U.S. interest.

“What the U.S. has in the Gulf is far superior than what the Iranian navy has,” said Houshang Arianpour, a retired vice admiral in the Iranian navy who is based in McLean, Va. “Therefore, I see no future for the Iranian navy, if they fight.”

Iran has far more to fear than the loss of its relatively small navy in the event of a disruption in Persian Gulf shipments: the inability to export its own oil.

Although Iranian officials have said that the West stands to lose more than Iran in any confrontation, analysts believe a stoppage in 2.5 million barrels a day of Iranian oil exports could prove just as damaging to the struggling Iranian economy.

Iran has said it will attempt to block the Strait of Hormuz only in the event of an international embargo on the country’s exports through the Gulf, Mr. Eisenstadt noted.

Write to Masood Farivar at [email protected] and Ian Talley at [email protected]

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