CRUDE OIL: Tension over Strait of Hormuz to Hurt India

Tensions over Iran have started escalating of late, which prop up global crude oil prices in an otherwise weak economic scenario, globally. As sanctions over OPEC’s second-largest oil exporter Iran tighten, how the Islamic Republic reacts will have a great impact on oil prices in 2012.
Annoyed over Iran’s continuing defiance in pursuit of its nuclear ambitions, the US had imposed growing number of economic sanctions on Iran. And more countries are following suit.
The US raised the sanctions one notch higher end-December by passing a law that would ban any institutions that deal with Iran’s central bank to do business with the US financial system. Since Iran’s central bank processes all oil payments, this measure will make it impossible for any country to buy crude oil from Iran. However, as the buyers of Iranian crude oil include the European Union, India, China and Japan, the US is going slow on the implementation of the law. However, the US demand that the buyers should progressively reduce their imports. The EU, which buys nearly onefifth of Iranian crude oil, is also working on imposing an oil embargo on the country. The foreign ministers of EU countries will be meeting on January 23 to discuss this. EU may further adopt the US stance to block any dealings with Iran’s central bank.
Last week, Japan also officially agreed to reduce its imports from Iran in a phased manner. Japan makes for around 13% of Iran’s oil exports. Chinese imports data revealed that its imports from Iran would halve for the first two months of 2012. The country is also exploring tie-ups with Saudi Arabia, which are seen as its efforts at diversifying oil imports. India, which is exploring ways of routing its payments to Iran, is unlikely to join the bandwagon unless the UN approves of the sanctions. The noose is tightening and Iran is bound to feel the pinch sooner or later. Crude oil makes up for over 80% of Iran’s exports and over one-fifth of its GDP. How it chooses to react will be a crucial question for global energy markets. Iran’s control over the narrow strip of water connecting the Persian Gulf with the Arabian Sea, known as the Strait of Hormuz, puts it in a dangerous situation.
Nearly one-fifth of global oil and one-third of LNG trade pass through the Strait, which makes it strategically important. Iran has, time and again, threatened to block this waterway in a bid to counter the US sanctions. Iran gets more and more isolated, it may very well be tempted to act upon its rhetoric. Although experts have called such an eventuality as ‘economic suicide for Iran’, it will have dangerous repercussions for global energy markets — oil prices could shoot past $200 per barrel. Iran may be in no position to face US navy positioned to protect the passage, but it’s very much capable of carrying out a sabotage. Admiral Habibollah Sayari, the head of Iran’s navy, recently boasted that closing the Strait would be “as easy as drinking a glass of water.”
India remains a mere spectator in this high-profile sabre-rattling. However, it could end up paying a particularly high price — with its heavy dependency on imported oil, huge petroleum subsidies and a widening trade deficit — if the tensions were to escalate.