Oil and the Straits of Hormuz

President Bush has decided to delay publicly outlining his new Iraq strategy until next month. In many ways, the new plan will represent a more difficult decision than the initial call to go to war in Iraq. Even

Mr. Bush has been forced to admit that post-Saddam Hussein Iraq has not turned out as expected. Mr. Bush is also buying time for the Iraqi factions — Sunnis, Shi’ites and Kurds — to figure out whether they can move closer to agreeing on national reconciliation efforts and trying to create a little space for newly minted Defense Secretary Robert Gates to assume his new role. When Mr. Bush announces his new approach, he will also decide how he will deal with the emerging Iranian nuclear threat. But the looming confrontation between the United States and Iran could affect something that had been unforeseen: global sea trade.

When I interviewed Donald C. Winter, the secretary of the Navy, I asked him to explain the importance of trade over the Straits of Hormuz, just off the south coast of Iran. “Hormuz is a major point that goes in and out of the north Arabian Gulf,” he said. Indeed, it is a critical point; 40 percent of the world’s oil passes through it every day.

But he said something even more important: “What happens in the world economy is affected by the sense of comfort — the idea that we can engage in shipping,” he explained. “The price of oil, for example, which has a very significant impact on the world economy… [Our] sense of security — those in the sector know their [survival depends on their] ability to ship oil from where it is produced to where it is needed. And therefore, any challenge to that ability to shift can affect not only the consumers of that particular product, but can affect the entire world economy.”

Last June, Iran’s supreme leader, Ayatollah Ali Khamenei, threatened to interrupt the world’s oil supply if the United Nations Security Council proceeds with a policy of sanctions against Iran over its nuclear program. “The United States and its allies would be unable to secure oil shipments passing out of the Persian Gulf through the Strait of Hormuz to world markets,” he said. Since Mr. Khamenei’s chilling warning, the U.N. Security Council has remained undecided on whether to pass a resolution on sanctions. The nuclear issue evidently is an important part of the decision-making process, but Iran’s threat to hold the world economy hostage by blocking the free flow of trade through the Straits of Hormuz should not be underestimated. What’s more, 90 percent of international trade is carried by sea.

It is possible to assume that Iran cannot deliver on its threat and block the sea trade there. However, do not forget that in March 2003, then-Deputy Secretary of Defense Paul Wolfowitz assumed that “the oil revenues of Iraq could bring between $50 billion and $100 billion over the course of the next two or three years.” Mr. Wolfowitz concluded that the money from the sale of Iraq’s oil would fund its reconstruction, taking the heavy burden from the United States. Today, the budget situation is dire, with record-breaking deficits and spending on Iraq that has far exceeded prewar estimates.

The price of oil remains closely tied to the political fortunes of U.S. leaders. Mr. Bush’s approval rating fell when oil prices rose last year, and was buoyed when the prices stabilized. While the Iraq issue remains paramount among Mr. Bush’s problems, there is another important reason why he would be reluctant to engage in a military confrontation with Iran. Assume that Iran decides to pull its 2.7 million barrels of oil a day from the world markets. The result would be an immediate increase in oil prices — most analysts suggest somewhere around $100 per barrel. In addition, if Iran carries out its threat to stop trade through the Straits of Hormuz, it would at a minimum double the price of oil per barrel.

Although the Bush administration and the U.N. Security Council are engaging in a lot of tough talk about Iran, any military option is the most unlikely. The stakes are so high that attacking Iran could easily create an oil crisis in the world economy, which would lead to a world economic crisis. The only way out is to maintain a strong position and steady nerves — and to think carefully and explore fiercely any option that does not involve “preventatively” attacking Iran’s nuclear sites. In the end, perhaps James Baker and Lee Hamilton’s Iraq Study Group was really advising diplomacy with Iran in mind.

Tulin Daloglu is a free-lance writer.