Here It Goes Again

via Exclusive: EU agrees to embargo on Iranian crude | Reuters.

(Reuters) – European governments have agreed in principle to ban imports of Iranian oil, EU diplomats said on Wednesday, dealing a blow to Tehran that crowns new Western sanctions months before an Iranian election.

If the deal is approved by the EU, Iran will be ‘between a rock and a hard place.’  Other customers of Iran, including China and India, will be able to force steep price discounts, leaving Iran in hard economic straits.  Already the price for foodstuff has soared in Iran, and the value of their currency is dropping.

The embargo will force Tehran to find other buyers for oil. EU countries buy about 450,000 barrels per day (bpd) of Iran’s 2.6 million bpd in exports, making the bloc collectively the second largest market for Iranian crude after China.

Biggest trading partner China, driving a hard bargain, has cut its orders of Iranian oil by more than half this month.

The economic sanctions and the oil embargo are a result of Iran’s nuclear program.  Although Tehran claims it is only for peaceful purposes, many other nations believe they intend to develop nuclear weapons.  Talks aimed at allowing UN inspectors into the country to visit the program broke down a year ago.

The oil embargo has already caused the price of crude to rise, and any embargo will be implemented in stages, to prevent a shock to the market.

In response to the proposed embargo Iran has been threatening to close the Strait of Hormuz, and on Tuesday they threatened to take unspecified action if a US carrier group sails back into the Persian Gulf.

Washington, which has a carrier strike group led by the USS John C Stennis in the Arabian Sea, brushed off that threat and said its navy would continue to sail the strait.

What will happen if Iran follows through on it’s threat?  How high will the price of oil go if the embargo takes place?  Where will Europe and China go for ‘replacement’ oil?

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Closing the Strait of Hormuz?

via Iran Threatens to Block Oil in Reply to Sanctions – NYTimes.com.

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.

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.

The first sanctions against Iraq, in 2006, did nothing to slow their uranium enrichment program.  Although Iran claims the program is solely for peaceful purposes, Western nations are fearful of a ‘nuclear Iran.’  The new sanctions would hit India and China, as well as Europe, very hard, since they buy most of Iran’s oil.  Supposedly the slack could be picked up by Saudi Arabia, but many analysts don’t think that’s possible.  Undoubtedly the price of oil would rise.

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.

Rising oil prices could set back the economic recovery, and cause more economic woes worldwide.  But an even worse outcome is possible – can Iran really block the Strait of Hormuz?  What will our response be if they try?

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