January 2nd, 2012
02:57 PM GMT
Abu Dhabi (CNN) – Iran is using what is normally a quiet holiday lull in the West to make the most of its military manoeuvres in the Strait of Hormuz, which have concluded after 10 days. The navy test-fired two types of long-range missiles, following the launch of medium-range devices on New Year’s Day.
From afar, it would appear that Iran is throwing its trump cards on the table very early in this standoff with the United States, the European Union and the six members of the Gulf Cooperation Council (Saudi Arabia, Bahrain, Kuwait, the United Arab Emirates, Oman and Qatar).
But analysts say the Iranian government sees it differently. The latest round of sanctions from Washington – built into the U.S. defense bill – among other things targets Iran’s central bank. This is similar to the strategy used by the European Union with its sanctions against Syria. If action is taken to cut off the arteries of a country’s financial system, then it becomes very difficult for it to trade any of its assets – most importantly oil in Iran’s case.
This explains the sudden plunge in Iran’s currency, the rial, to a record low after U.S. President Barrack Obama signed the legislation. The spread between the official central bank rate of 11,179 rials against the dollar and the public exchange rate widened by nearly 5,000 rials, according to IRNA, the Iranian state news agency. A sustained plunge in the currency could drive up the cost of imported goods and spark inflation.
Mehdi Varzi, a veteran energy strategist and now president of the consultancy Varzi Energy, says Iran is feeling boxed in and is therefore lashing out with military manoeuvres and the test-firing of missiles. “Iran is trying to react to something that is being threatened by the West,” says Varzi. “It is a very real and dangerous threat to the country.”
Military manoeuvres, strategists suggest, are a warning not only to the U.S. and Europe but to the GCC. In its final communique at their summit last month, the six members of the GCC called on Iran to stop meddling in internal affairs and attempts to "instigate sectarian strife." Saudi Arabia’s $30 billion military order, approved by Washington after that GCC communiqué, also seemed to raise tensions before Iran’s military exercises started.
Iran, according to Facts Global Energy, earned $73 billion from oil exports in 2011 on exports of 2.2 million barrels a day. The oil sanctions being considered by the EU would cut off less than a quarter of that total, or about 450-500 thousand barrels a day. Major Asian customers, strategists say, would carry on importing – notably China, South Korea and Japan. With little spare oil capacity in the world, those countries cannot at this juncture live without Iranian crude. FGE estimates that sanctions could reduce Iran’s exports by 10-15 percent with an annual cost of about $15 billion to Iran.
For its part, Iran’s oil minister Rostam Qassemi suggests that oil sanctions against its exports could double prices from today’s levels of about $107 for the benchmark North Sea Brent Crude.
Energy strategist Varzi says there is already a premium built into today’s price - but that premium is for a threat, not military confrontation in and around the Strait of Hormuz, through which passes one-fifth of daily global oil exports.
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