In response, Iran's central bank yesterday instituted its own form of "quantitative easing," flooding the market with U.S. dollars from its reserves. The rial appreciated around 20% against the dollar but demand still remains high.
This shock to Iran's internal economy should be a wake up call to the mullahs in Tehran. It is just one of possible negative side effects of ramping up the rhetoric with the U.S. To be clear, Iran could successfully close the Strait of Hormuz if it really wanted to. It doesn't even need its Navy to do it. It could simply sink a few barges in the narrowest parts of the waterway and lay a few mines. That would make the strait impassible to the dozens of supertankers that go in and out of the Persian Gulf everyday.
But the question is: can Iran afford it? Clearly not. Shutting the straits down in such a crude fashion would not only block supertankers from Saudi Arabia, Kuwait and Iraq from getting through the strait, but would also block its own super tankers from getting through as well. With the oil trade making up around 60% of Iran's economy, that would be disastrous. Sure, oil could spike as high as $200 a barrel, but if Iran can't get its oil out to market, it won't be able to profit off the chaos it created.
Shutting down the Persian Gulf would be equivalent to Iran slicing its own wrists. Vital deliveries of food, fuel and other goods from abroad would have no way of reaching the country. The internal chaos created could see a mass revolt in the country where the majority of the population cares more about their quality of life than the Mullah's chess game with Washington.
Likewise, the U.S. would loathe having a conflict with Iran given how important it is to the international oil markets. While Iranian oil doesn't run through U.S. refineries, it does run through those in Asia and Southern Europe. Taking that supply off the market will force those countries that depend on Iranian oil to look to other countries that do export oil to the U.S., therefore decreasing worldwide supply and causing prices to spike. Saudi Arabia and Russia do not have enough spare capacity to replace all the barrels lost if Iran were to go offline, so there would certainly be shortages at the gas pump. The result could crush the nascent economic recovery in the U.S. and push all of Europe into a deep recession.
The U.S. and Iran may hate each other, but their fates are inextricably linked. Neither side is itching for war given all the negative side effects that could come to both of their economies. Oil prices should eventually calm as it becomes clear that this battle between East and West is more about dollars than ideology.
