Blockade of Strait of Hormuz would tip EU, US into recession

09 January 2012 21:39  [Source: ICIS news]

WASHINGTON (ICIS)--An Iranian blockade of the Strait of Hormuz would have a huge impact on world oil prices and could plunge Europe into deep recession and likely bring the US recovery to a halt, a leading manufacturers group said on Monday.

In an analysis of the simmering crisis relations between the US and Iran, the Manufactures Alliance for Productivity and Innovation (MAPI) said that while the prospect of Iran blocking the strait is considered unlikely, such an action could devastate the global economy.

In a white paper titled “Oil in a Strait Jacket?”, MAPI economist Donald Norman said that blockage of the Strait of Hormuz could pump global oil prices from their current $100/bbl range as high as $290/bbl or even $380/bbl if the interruption of oil supplies through the strait were prolonged.

In recent weeks various Iranian officials have threatened that Tehran would close the strait if the US and allies go forward with further sanctions aimed at impeding what the US and other nations allege is Iran's nuclear weapons programme.

Norman noted that about 17m bbls/day of crude oil move through the strait, representing 19% of global consumption.

The US receives approximately 1.825m bbls/day of oil through the strait, consisting of crude from Iraq, Kuwait and Saudi Arabia, and accounting for nearly 10% of daily US oil consumption.

Any increase in the global price of crude would be reflected in the prices of petroleum products, he noted.

“Currently, the spot price of oil [WTI] is around $103/bbl and the average price of gasoline in the US is $3.32/gal.  If the price of crude oil rose to around $170/bbl, gasoline would reach $5/gal,” Norman said.

But any closure of the Strait of Hormuz would likely be temporary, Norman said, because such an action would be devastating to Iran’s own economy.  The country relies on its oil sales through the strait for 80% of the Tehran government’s spending, and Iran also imports 40% of its fuels through the strait.

Norman said that an unnamed former US Navy secretary said that if Tehran were to move to block the strait, the Iranian navy would be destroyed within two days of naval conflict – an outcome Tehran also would seemingly like to avoid.

However, if Tehran were to take such rash action, the resulting spike in oil and energy costs “would likely throw the eurozone into a deep recession, Norman said.

The US could draw on its emergency oil supplies – the Strategic Petroleum Reserve (SPR) – to make up for the loss of oil that would normally transit the strait, he noted. 

That reserve, created precisely for an emergency situation such as a Strait of Hormuz closure, holds nearly 700m bbls of crude and could make up the 1.825m bbls/day lost from Persian Gulf suppliers for as long as a year.

Still, a crisis in the Strait of Hormuz would raise oil prices sharply, and that in turn would put the US economy back into recession if the price hikes held for more than three months, Norman said.

($1 = €0.79)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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