Is the Oil Price Scare From The Strait Of Hormuz Over?

Maybe not, but there is good reason to think that maybe it is over, even though US gasoline prices were still rising over this past weekend. But that is probaby just the pass-through of the earlier spikes in crude prices due to the scare arising from Iran's threat to close the Strait of Hormuz, which it is capable of doing, if the US follows through on its newest economic sanctions, which it appears to be doing. In the longer run higher oil prices would be useful for getting us onto a more sustainable energy path, but in the short run they certainly do not help get the world economy out of its prolonged slump of recent years. I see two signs here.

The first was the report last Wednesday that Israeli Defense Secretary Ehud Barak has announced that Israeli military intelligence has concluded that Iran is not currently in active pursuit of nuclear weapons and that any decision by them to bomb Iran is "far off" in the future. Needless to say, this undercuts some of the more hysterical "bomb Iran" presidential candidates in the US. But, of course, this does not remove the new economic sanctions that Iran was objecting to and which many think that the US and Europe were going along with partly to restrain Israel from such bombing efforts.

The other sign is that over the weekend the Iranian vice president has specifically denied that Iran is planning to block the strait. One can dismiss this, just as many dismiss the anti-nuclear weaons fatwas of Iran's supreme leader, Khamene'i (that is to say, some of those who actually know that he has issued such fatwas, not widespread public knowledge), but it does look as if Iran has backed off for whatever reasons. It now looks extremely unlikely that the Strait of Hormuz will be blocked, even though the US looks to be following through on the new sanctions, which most reports say are already hurting the Iranian economy. Three further thoughts.

One is that David Ignatius claims in WaPo that this was due to Obama putting pressure on Iran through back channels. Maybe, although this smells a bit like the administration giving itself too much credit and leaking this to Ignatius. I suspect that backing off by Israel has played a bigger role.

Another point is that Iran has enough outs to avoid the worst of the economic outcomes. The main method for these sanctions is to attack settlements of oil sales through the Iranian central bank. Yes, several major customers of Iran appear to be scaling back purchases, such as Japan and China. But there are limits to this, particularly if indeed oil prices go up rather than back down (or stay steady). More importantly, Venezuela and possibly other countries are apparently setting up financial arrangements that may allow for these contracts to be completed without being directly blocked by the sanctions. So, Iran may already have seen the worst economically.

And finally, the main evidence for problems is the decline of the Iranian currency. However, such a decline makes it easier for the non-oil sector of Iran's economy to compete with foreigners and even possibly export, Iran usually suffering from the well-known "Dutch disease" endemic to so many nations dependent on exports of a highly priced natural resource. They have a respite from this a bit, although of course imports are more expensive also. Iran is taking a hit economically, but in the end the sanctions will probably backfire politically in Iran, given the strong support even by the political opposition of their civilian nuclear power program.