A Standoff Over Oil: Tensions Rise Between the U.S. and Iran

A Standoff Over Oil: Tensions Rise Between the U.S. and Iran

The escalating tensions between Iran and the U.S. have been like a chess game. One in which each move creates a global ripple effect.

A few weeks ago, Iran completed naval exercises in the Persian Gulf, which alarmed the U.S. and intensified fears about the country’s nuclear program. The U.S. reciprocated, pressing for economic sanctions as punishment.

Then Iran threatened to close the Strait of Hormuz—the highly strategic strait at the mouth of the Persian Gulf, through which about 20% of the world’s traded oil passes. In response, the U.S. Navy’s Fifth Fleet said that disruption of traffic “will not be tolerated,” since this would harm America’s oil interests. That, of course, was Iran's point.

Next, posturing, Iran sentenced the American Amir Mirzaei Hekmati to death. It also confirmed that it’s enriching uranium at a secure underground facility. It's creating "20% uranium," which is the kind of uranium with enough of a certain isotope that it can be used in nuclear weapons—meaning we probably have six months to a year before Iran has weapons-grade uranium. The U.S. is leading efforts to lash back. On December 31, the U.S. tightened economic sanctions to its toughest yet against Iran. Meanwhile, the E.U. is weighing a ban against Iranian oil, in solidarity.

But all this back and forth doesn't mean everything has to end badly: Twice in the past two weeks, the U.S. military has rescued Iranian sailors from pirates in these same troubled waters. The captain of the Iranian coast guard vessel that picked up the rescued sailors thanked the Americans who saved them.

Will the Sanctions Work?

The main point of the sanctions is to starve Iran monetarily, pushing it, the world’s third largest oil exporter, out of the energy market, weakening the Iranian economy and forcing the government to stop pursuing its nuclear program.

But critics cite the fact that the sanctions won’t be implemented for six months, and then only if Washington determines that there are enough other ways to get oil without destabilizing the world market. Europe is on board, but 20% of Iran’s oil exports go to China and 17% go to Japan. Japan has been exploring its options, and, in particular, trying to figure out if Saudi Arabia could make up the difference in its oil needs. The island nation has announced its readiness to cut the amount of crude oil it imports from Iran, but China has been defiant about going along with the sanctions.

Although supportive of the U.S., countries like Japan and South Korea are also worried about the impact these anti-Iranian sanctions could have on international crude prices and their own economies.

Land of Last Resort: Will This Spark an International Oil Crisis?

If countries like Japan turn to Saudi Arabia as an alternative to Iranian oil, Saudi Arabia could be under more pressure to increase its production. Oil prices have been rising for the past three weeks in response to fears about the Strait of Hormuz. If and when sanctions go into effect, worldwide oil prices will probably increase; according to The Atlantic, it wouldn’t be a question of whether oil prices rise but by how much.

Oil prices aren’t just about supply and demand—they’re also about feelings of security. Saudi Arabia doesn't sell 100% of the oil it could sell, and that's on purpose. Those reserves are considered “last resort” because they’re there in case anyone needs extra oil, like an insurance policy for oil-consuming nations across the globe in case something happens to the regular supply. But, if the rest of the world supplements their oil needs with Saudi reserves, that would use up the country’s excess, meaning there wouldn't be any more wiggle room for further emergencies. Using up this "fail-safe" oil comes at a price, because the more risk that there won't be any oil later, the higher the cost to buy what's left.

If Iran makes good on its threat to close the Strait of Hormuz, strategic reserves could tide the rest of the world over for about a month. But, the way things are right now, the global community may not be able to make do without Iran's oil contribution, as it is the world's third largest oil producer, producing more than even Iraq. During that time, the U.S. would likely have to clear the straits through force. And, of course, if there’s a military conflict, there’s no predicting what would happen—to the world, let alone oil prices.

Paying at the Pump: How This Affects You

2012 has already had a record start in terms of gas prices, and they’ve recently jumped even higher. This is partially because of stronger U.S. economic growth (the better the economy does, the higher the demand for gas), but also because of the Iran tensions. Gas prices are only expected to increase. According to forecasts, the national average will range between $3.86 and $4.13 per gallon by Memorial Day. All told, this means that drivers could spend $200-$300 more on gas in 2012.

Political waves aside, the best way to protect yourself against higher gas prices is to adjust your budget in the My Money Center. Consider allocating a bit more for transportation costs for the time being, or, if you can, relying more on carpooling or public transportation.

Just be aware of choppy seas if you decide to travel by boat.

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