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‘Lifting oil price is easy, block the Persian Gulf’

Here’s an easy fix to the ultra-low oil price; do what Iran has been promising to do for decades, block the Straits of Hormuz

Suggested partly as dark humor there would be a delicious irony in delivering to Iran precisely what it has consistently threatened to do, block a critical choke point at the eastern end of Persian Gulf to stifle the flow of oil to the rest of the world.

Persian Gulf Tensions Shipping Risks
An oil tanker on fire last year in the sea of Oman, near the Straits of Hormuz. (AP Photo)

In one move the oil-price crash would be fixed with up to 30% of global oil supply removed from the market.

The World Has Flipped

It won’t happen, or at least it’s extremely unlikely to happen, but it is an example of how the world has been turned upside down by the dramatic change in oil from being a commodity in short supply to one in glut.

How the flip occurred has been well-documented. The U.S. discovered technology to unlock oil and gas previously regarded as too tightly locked in rock reservoirs to flow to the surface, Russia and Saudi Arabia cranked up production and demand peaked.

Of those events the most significant, and least expected, is the peak in oil demand, the exact opposite of what the theory of peak oil was based on for 40 years, that oil production would peak and the world should prepare for an oil shortage.

Toothless Tiger

It was peak-oil theory which helped embolden the now toothless tiger of the oil industry, the Organization of Petroleum Exporting Countries (OPEC), to cut off oil supplies in the 1970s, triggering a rolling economic crisis in the western world.

Having demonstrated the ability to harm the west in the 70s, members of OPEC have routinely threatening to block the Straits of Hormuz as part of their ongoing demands for higher oil prices.

Iran in particular has been a keen supporter of blocking the Straits through which passes a narrow shipping channel which sees a never-ending flow of crude-oil carriers from Saudi Arabia, Iraq, Kuwait and other Persian Gulf producers, including Iran.

In the latest saber-rattling exercises in the region, Iran was reported in April to have shifted anti-ship missiles to Qeshm Island in the Straits, and a flotilla of small boats have harassed U.S. warships on tanker-guarding duty.

But this is where the new dynamic of the oil glut and low oil prices becomes quite interesting because yesterday the U.S. took the unusually aggressive stance of suggesting that if Iran wanted a conflict the U.S. was ready.

“Shot Out Of The Water”

President Trump, in response to Iranian speed-boat provocations, said they should be “shot out of the water”.

That Tweet from the President is not an order but if a navy commander in the Gulf took it the wrong way then the next time the small boats swarm around a U.S. Navy ship the result could be an exchange of fire which should only have one result, sunken Iranian ships.

It wasn’t that long ago that Iran’s response would have followed standard procedure, starting with a threat to blockade the Straits to prevent oil reaching the global market.

This time around a blockade would deliver a very different result, and perhaps that’s why the U.S. is throwing caution to the wind and daring an Iranian response.