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Iran's oil dilemma

It could create chaos by choking off oil, but would deeply wound itself, too.

VIENNA, Austria - Iran's potential to shut down nearly 40 percent of the world's oil trade represents a weapon possibly more powerful than its missiles 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 nation'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 oil and blocks Persian Gulf supply lines.

Oil remains near historic heights. And jittery markets spike at every hint of new tensions over Tehran's nuclear defiance.

But recent fuel price increases pale compared with the once-unthinkable levels that could be reached - experts speak of up to $200 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 program is only for energy purposes.

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.

But U.S. military officials and independent experts are skeptical of Iran's military ability to keep the strait closed.

Anthony Cordesman, of the Washington-based Center 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."

Cordesman estimates an Iranian blockade could not last more than two weeks.

"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."

Tehran, for instance, could opt to use its influence among Shiite militias in neighboring Iraq. Sabotage of oil pipelines and facilities could cripple much of Iraq's exports, which are 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 - 80 percent of export revenues would be 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 Center. "It's one thing to test the market psychology, it's another to take the actual step and stop oil exports."

[Last modified December 2, 2007, 01:36:02]