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AFP Iran's Navy Commander Admiral Habibollah Sayari announces 10 days of naval drills from Dec. 24, covering east of the Strait of Hormuz and the Gulf of Oman to the Gulf of Aden at a press conference in Tehran.  (File photo)


A senior Iranian official delivered a sharp threat in response to economic sanctions being readied by the United States, saying his country would retaliate against any crackdown by blocking all oil shipments through the Strait of Hormuz, a vital artery for transporting about one-fifth of the world's oil supply.

The declaration by Iran's first Vice-President, Mohammad-Reza Rahimi, came as President Barack Obama prepares to sign legislation that, if fully implemented, could substantially reduce Iran's oil revenue in a bid to deter it from pursuing a nuclear weapons programme.

Before the latest move, the administration had been laying the groundwork for cutting off Iran from global energy markets without raising the price of gasoline or alienating close allies.

Apparently fearful of the expanded sanctions' possible impact on the already-stressed economy of Iran, the world's third-largest energy exporter, Mr. Rahimi said: “If they impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz,” according to Iran's official news agency.

Iran just began a 10-day naval exercise in the area.

Obama Administration officials have recently said that the United States has a plan to keep the strait open in the event of a crisis.

In Hawaii, where Mr. Obama is vacationing, a White House spokesman said there would be no comment on the Iranian threat.

That seemed in keeping with an effort to lower the level of angry exchanges, partly to avoid giving Iran the satisfaction of a response and partly to avoid spooking financial markets.

But the energy sanctions carry the risk of confrontation, as well as economic disruption, given the unpredictability of the Iranian response.

Some administration officials believe that a plot to assassinate the Saudi ambassador to the United States which Washington alleges received financing from the Quds Force, part of Iran's Islamic Revolutionary Guards Corps was in response to U.S. and other international sanctions.

Merely uttering the threat appeared to be part of an Iranian effort to demonstrate its ability to cause a spike in oil prices, thus slowing the U.S. economy, and to warn U.S. trading partners that joining the new sanctions, which the Senate passed by a rare 100-0 vote, would come at a high cost.

Oil prices rose above $100 a barrel in trading after the threat, although it was unclear how much that came from investors' concern that a Persian Gulf confrontation could disrupt oil flows.

The new punitive measures, part of a bill financing the military, would significantly escalate U.S. sanctions against Iran.

They come just a month and a half after the International Atomic Energy Agency published a report that for the first time laid out its evidence that Iran may be secretly working to design a nuclear warhead, despite the country's repeated denials.

In the wake of the IAEA report and a November attack on the British Embassy in Tehran, the European Union is also contemplating strict sanctions, such as an embargo on Iranian oil.

Some economists question whether reducing Iran's oil exports without moving the price of oil is feasible, even if the market is given signals about alternative supplies.

Already, analysts at investment banks are warning of the possibility of rising gasoline prices in 2012, due to the new U.S. sanctions and complementary sanctions under consideration by the EU.

Since Obama's first months in office, his aides have been talking to Saudi Arabia and other oil suppliers about increasing their production, and about guaranteeing sales to countries like China, which is among Iran's biggest customers.

But it is unclear that the Saudis can fill in the gap left by Iran, even with the help of Libyan oil that is coming back on the market.

The United States is also looking to countries like Iraq and Angola to increase production.

Daniel Yergin, whose new book, The Quest, describes the oil politics of dealing with states like Iran, noted in an interview that “given the relative tightness of the market, it will require careful construction of the sanctions combined with vigorous efforts to bring alternative supplies into the market.”

Said Michael Singh, managing director of the Washington Institute for Near East Policy, “The only strategy that is going to work here is one where you get the cooperation of oil buyers. You could imagine the Europeans, the Japanese, and the South Koreans cooperating, and then China would suck up all of the oil that was initially going to everyone else.”

A broader question is whether the sanctions even if successful at lowering Iran's oil revenue would force the government to give up its nuclear ambitions.

But one measure of the effects is that Iranian leaders are clearly concerned.

Already the Iranian currency is plummeting against the dollar, and there are rumours of bank runs.

“Iran's economic problems seem to be mounting and the whole economy is in a state of suspended expectation,” said Abbas Milani, director of Iranian studies at Stanford University.

“The regime keeps repeating that they're not going to be impacted by the sanctions. That they have more money than they know what to do with. The lady doth protest too much.”

(New York Times News Service)

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