Iran brandishes 'shipping card' as nuclear row escalates

Dubai (Platts)--6Feb2006

An Iranian lawmaker has raised the stakes in Iran's nuclear crisis with a
warning that his country holds the "key to security" in the Persian Gulf,
through which 40% of the world's tradeable crude oil is shipped to markets.   

     Soleiman Jafarzadeh of the Majlis National Security and Foreign Policy
Committee was quoted Saturday as saying that "any kind of pressure or threats
against Iran would inflict severe damage on Western countries in the Middle
East, particularly in Iraq and Afghanistan," a reference to the US military
presence in both countries.

     He added that "those countries that claim they can increase their oil
production in order to prevent a rise in the price of oil, in the event that
the UN imposes sanctions on Iran, should know that the Islamic Republic holds
the key to security in the Persian Gulf." 

     Jafarzadeh's remarks as carried by the semi-official Iranian Mehr news
agency, were widely reported by Arab media and made the front-page of the
Saudi-owned newspaper al-Hayat Sunday under the headline: "Iran brandishes the
Gulf shipping card." 

PERSIAN GULF IS HOME TO 60% OF GLOBAL OIL RESERVES

     The Persian Gulf contains 715-bil bbl of proven crude oil reserves,
roughly 60% of the world's total and some 45% of global natural gas reserves.
More importantly, the region is home to nearly all the world's spare oil
capacity, the bulk of it in Saudi Arabia.

     OPEC powerhouse Saudi Arabia as well as neighbors Kuwait, Iraq and the
UAE all export crude oil from Gulf ports though the Saudis have access to the
Red Sea and could in an emergency ship more crude from Yanbu and via the SUMED
pipeline through Egypt.

     Iraq can export from Turkey's Ceyhan port by switching the flow of its
north-south pipeline but that avenue has been closed to it because of sabotage
on its main northern pipeline.

     The US Energy Information Agency says the Gulf states ship 90% of their
combined crude oil exports -- around 17.2-mil b/d in 2003 -- through the
600-mile Persian Gulf. Analysts say the slightest hint of disruption through
the world's busiest international oil route would send oil prices through the
roof in a market tight on spare capacity. 

     "If this were to happen, you could see oil at $100 per barrel," said one
regional oil trader. 

     Crude oil prices resumed their upward march Monday in reaction to Iran's
decision to end snap inspections of nuclear installations and preparations to
resume uranium enrichment work after the International Energy Agency's
governing board voted to refer the case to the UN Security Council.

     Tehran has insisted that its program is peaceful though Washington and
its allies suspect that behind its determination to carry out highly sensitive
nuclear enrichment work is a desire to produce nuclear weapons.

     The IAEA resolution puts off any UN action against Iran for at least a
month to give time for diplomacy before the issue goes to the UN Security
Council, which has the powers to impose political and economic sanctions.     

    Iran, the world's fourth biggest crude oil exporter and holder of the
second biggest gas reserves after Russia, says it wants to develop a peaceful
nuclear program because it consumes roughly half of the oil it produces. Iran
is currently producing just under 4-mil b/d. Exports averaged 2.7-mil b/d in
2005, according to International Energy Agency figures. 
   
IMPLICT IRANIAN THREATS SPOOK MARKETS

     Although Jafarzadeh's comment is not official government policy, other
Iranian officials have said that any attempt by the international community to
impose sanctions against Iran would lead to higher crude oil prices in what
has been seen as an implicit threat to withhold crude oil. 

     Saudi Arabia, which holds a quarter of the world's crude oil reserves,
has said it stands ready to make up for any shortfall on world markets be it
because of war, natural disasters or higher demand. 

     The Persian Gulf is no stranger to regional conflict though it has never
closed to maritime traffic. Its waters were mined during the Iran-Iraq war of
1980-1988, when then Iraqi president Saddam Hussein attacked Iran in a bid to
control the key Shatt al-Arab waterway. Iraq's 1990 invasion of Kuwait and the
US-led war against Iraq all led to fears that the vital shipping lane would be
restricted to oil tanker traffic but while oil prices soared, oil exports were
largely unaffected. Rising insurance costs did add a risk premium to the oil
barrel at the time and could do so again. 

     "The Iranians are the only ones in the Gulf who have the capacity to
close the straight (of Hormuz) because they are the only ones with ships and
military," said Judith Kipper, head of the Middle East program at the Council
on Foreign Relations in Washington. 

     She pointed out that the other Gulf littoral states relied for protection
on the US, which has a major naval base in Bahrain and a big airbase at
Al-Udaid in Qatar.

     "The US reluctantly has the responsibility to protect the free flow of
oil that fuels the US economy," she said. "It raises the whole issue of energy
security," said Kipper. 

     US President George W. Bush highlighted energy security in his State of
the Union address, where he called on Americans to end their addiction to oil
and pledged to cut reliance on Middle Eastern crude oil by 75% in 2025 by
investing in alternative fuels like ethanol and "clean, safe nuclear" energy. 

     Of the Gulf producers, only Saudi Arabia is a major exporter of crude oil
to the US market. The Persian Gulf accounted for 22% of US net oil imports in
2003 and 12% of US demand. 

     Closure of the Strait of Hormuz, the narrow straight that leads out to
the open sea, would be the ultimate energy security nightmare.

    Just the likelihood of disruption to Gulf shipping is enough to cause
jitters in a tight oil market where the available spare capacity is not enough
to make up for the potential combined loss of volume from the Gulf states.    

     Saudi Arabia, with current production of around 9.5-mil b/d and capacity
of 11-mil b/d, can only make up 1.5-mil b/d of any shortfall.

     The Gulf oil producing states ship 90% of their crude oil through the
Strait of Hormuz. The US energy department's statistical arm, the Energy
Information Agency, says that closure of the Strait of Hormuz would require
use of longer alternative routes at increased transportation costs.

     The IEA said in its 2005 World Energy outlook for the Middle East and
Africa that the most significant oil supply disruptions of the last few
decades occurred in the MENA region. 

     "In previous conflicts, such as the Iran-Iraq war and the Iraqi invasion
of Kuwait, oilfields and tankers were systematically targeted. Supply
interruptions can also result from deliberate political acts by the producing
government," it said. 

MILITARY OPTION ON THE TABLE

     The US has not ruled out the military option against Iran for now and
Israel's acting prime minister Ehud Olmert said Sunday Tehran would pay a
heavy price if it pressed ahead with its uranium enrichment plans. 

     "All options, including the military one, are on the table," US defense
secretary Donald Rumsfeld said in an interview with Monday's edition of German
financial newspaper Handelsblatt.

      But Washington-based consultants PFC Energy believe the US military
involvement in Iraq made this unlikely. "The scale of the US campaign in Iraq
limits the Bush administration's military options ..." said Washington-based
consultants PFC Energy in a Feb 3 report on the Iranian crisis.

      "Washington's options are similarly constrained on the political front,"
it said, noting that none of the other permanent members of the Security
Council favored an oil and gas embargo. "Absent an egregious move by Tehran,
none of its P5 (permanent five) partners favor economic sanctions, especially
any embargo that limits Iranian oil and gas exports. The economic costs to
consuming nations would arguably be as painful as the financial damage to
Iran," it said. 

		-- Kate Dourian, kate_dourian@platts.com 

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