Politics in the News

I was thinking about my new format yesterday and I wanted to make a small change. Instead of relying various tips and tricks on Thursday I want to talk about a political issue in the news. I feel that most of the things I write are a tip in some way and so that doesn't leave Thursdays with a real theme. I chose politics in the news because I have a passion for politics and I miss discussing it and I thought it would make an interesting topic for Thursdays. So today I want to quickly talk about the issue with Iran in the news

Iran is threatening to block the Straight of Hormuz, the 21 kilometer wide body of water that connects the Persian Gulf to the Red Sea. The reason Iran is threatening this action is in response to the Euro Zone and the United States tightening sanctions on Iran. Specifically those sanctions focus on Iran's oil production, the sole lifeline for Iran's economy.


This threat has shaken investors and made many oil producers weary of the situation. In response to these actions the United States has moved its 5th Fleet carrier group into the Red Sea. While this is not an unusual move in most cases, in this situation the move signals the U.S.'s commitment protecting the vital flow of oil through the Persian Gulf. This move was made while Iran was in the middle of a 10 day long war game designed to show Iranian naval might.

This further angered Iran who responded with verbal statements noting how easy it would be for Iran to close the Straight. While this has further caused concerns over the escalation of situation I don't believe violence will ensue in the Persian Gulf.

Iran often threatens the world and dares other countries to stop them. That said the Iranian government is not stupid. They understand that their navy is vastly out matched by the U.S. 5th Fleet. The fleet has a number of air craft carriers including its flag ship the U.S.S Stennis one of the largest in the U.S. Navy, a Nimitz Class Super Carrier. This carrier is supported by a large strike group to protect and supply the carrier. The Iranian navy does not posses any carrier and its navy consists of small boats armed with anti-ship missiles, mine laying ships, fast patrol boats, and mobile land based anti-ships missile systems.

The U.S. has been prepared for a situation such as this for decades. The 5th fleets main duty in the Persian Gulf is to protect the vital supply of oil and their are contingencies in place for an attack on the straight. NATO would respond with due force as well if Iran blocked the straight.

Other oil producing nations such as Saudi Arabia have condemned this action by Iran for fear losing vital revenue from the sale of oil. China and Russia, Iran's main allies would have no choice but to respond against Iran. Russia now has valuable oil contracts in Iraq and China relies heavily on oil from the region to fuel its extensive economic growth. Both have no interest in any interruption in traffic through the straight.

With the presence of the U.S. fleet and extensive surveillance of the straight by the U.S. and its allies Iran would not be able to close the entire straight before the U.S. responded with force to reopen the straight.

Now what does this all mean for us. If in the extreme case that Iran did attempt to close the Straight the U.S. would respond with force to reopen the straight before Iran could cut off all traffic. Other oil producing nations pledged to increase the supply of oil should Iran close the Straight. This could be disastrous to an already fragile world economy. Financial markets might not survive the shock should the conflict last long. Consumers and business would see a spike in oil prices harming fragile domestic economies. Rising discretionary spending by consumers would likely fall in response to higher oil prices. The spike in oil prices would also send shocks through various manufacturing sectors causing and increase in costs that could harm the falling trend in unemployment.

Again I must stress the unlikely possibility of this happening. This situation has happened before during the 1980's in response to Israeli bombs dropped on an Iranian nuclear materials production facility. Iran backed down in that situation and will most likely do the same here. The biggest loser in this situation would be Iran. Iran's economy is solely based on its oil production, 80% of its revenue comes from oil. Any attempt to close the straight and subsequent response by the U.S. would disrupt all traffic in the straight including Iranian shipments. Additionally, all imports headed for Iran must go through the straight which also would be disrupted by any conflict over the straight. Iran's threats are only rhetoric reflecting Teheran's concern over the increased sanctions and a fear that their oil may be replaced by oil from other countries like Saudi Arabia with little increase in the price of oil.