Iran, So Far Away, Part 3

With the US and western countries ready to hit Iran with oil export sanctions and Saudi Arabia and other OPEC allies ready to boost production to make up for Iranian shortfall, the Iranians aren't about to simply roll over, as they do have one major piece of leverage left:  oil tanker traffic in the Strait of Hormuz.

Iran's threat to stop the flow of oil from the Gulf supported crude prices on Wednesday and put world shares on the back foot, while looming Italian debt auctions hampered the euro.

Tehran said on Tuesday it would stop oil transiting through the Strait of Hormuz if sanctions were imposed on its crude exports over its nuclear ambitions, a move that could conceivably trigger military conflict with economies dependent on Gulf oil.

Brent crude oil steadied above $109 a barrel after climbing more than a dollar in the previous session. Prices have surged over 5 percent since Dec. 16.

European shares dropped 0.4 percent and Asian stocks also slipped, pushing the MSCI world equity index down 0.25 percent on the day.

"The only way Iran would actually close Hormuz is when it is attacked and war breaks, but such a possibility appears low as no country would want to take the risk when growth worldwide was likely to slow down," said Naohiro Niimura, a partner at research and consulting firm Market Risk Advisory Co.

But he added the tensions would be a major source of volatility in 2012 along with the euro zone debt crisis. He expected Brent to trade between $105-$110 in 2012.

If all Iran has to do in order to force $110 a barrel oil is look crosseyed at the Strait of Hormuz, and can boost what exports it can make by jacking up prices through zero-cost saber-rattling, it seems like somebody hasn't quite thought these oil sanctions through all the way. You won't hear OPEC countries complaining too loudly either.  Iran doesn't have to actually do anything in order to keep oil in the triple digits for the foreseeable future.

I'm betting Iran thinks it can cause just as much economic damage to the US through higher oil prices than the US can cause to it through sanctions...and considering the sanctions may end up benefiting Iran in the long run if it can keep oil prices high and sell less oil for more money, it's the rest of the world that gets hurt through more expensive fuel.  Iran may actually come out ahead.

We'll see who wins.  It's the American consumer who stands a fair chance of being the loser, however.