EU ban on Iranian oil hikes Hormuz tension

Europe's move toward banning Iranian oil imports, vital to Iran's besieged economy, has sharpened tensions in the Persian Gulf, where Tehran has threatened to block the strategic Strait of Hormuz if new sanctions are imposed. Oil prices rose sharply to an eight-month high of around $113 per barrel following the European Union's agreement in principle Wednesday to impose the ban. France's Societe Generale warned that prices could hit $125 a barrel in the coming days amid market concerns over the unfolding crisis and escalating Iranian threats against U.S. forces in the region. A shutdown of the 112-mile strait, the only way in and out of the gulf, would cut off around one-fifth of the global oil supply and, some analysts say, would skyrocket prices as high as $250 a barrel. On New Year's Eve, U.S. President Barack Obama signed into law unilateral sanctions targeting Iran's central bank to make it harder for Tehran to sell its oil. The bank handles Iran's oil transactions and funnels more than 90 percent of hard currency into the local market. The United States has already banned imports of Iranian crude. A similar step by Europe would have serious repercussions for an economy already starting to flake. Iran's oil sales earn it some $70 billion a year, 80 percent of its annual foreign revenue income. Western action has hit Iran's currency hard. The rial fell more than 11 percent in a week, slumping to an all-time low of 17,000 to the U.S. dollar. A year ago the rate was 10,500 to the dollar. This has intensified the economic pressure on Iran from four rounds of increasingly harsh sanctions imposed since the United Nations cracked down in June 2010 over Iran's nuclear program. France is pressing the European Union to join the ban. Iran sells large amounts of crude to China, India, South Korea and Japan but Italy, Greece and Spain are also big buyers. EU officials say European opposition to the proposed ban is eroding, with Greece, already crippled by the global recession, lifting its objections Monday. French Foreign Minister Alain Juppe says EU foreign ministers are expected to announce harsher sanctions on Iran's energy and banking sectors, possibly involving a ban on Iranian oil imports, at their next meeting Jan. 30. That could involve some 600,000 barrels per day in Iranian exports and would likely mean that Saudi Arabia, the world's largest oil producer, would have to step in to maintain the global supply and prevent a potentially dangerous price surge. The impact of a European import ban is difficult to calculate as Tehran could simply boost sales to the energy-hungry Asian market, where it has a key ally in China -- although these would be hit by closing Hormuz. Beijing has been keen to secure increased Iranian oil supplies and, along with Russia, has blocked efforts in the U.N. Security Council to impose an international ban on Iranian exports. The Saudis have 2 million bpd in spare production capacity. But covering a severe slump in Iran's exports, along with cuts by Libya, Syria and Yemen amid the political turmoil convulsing the Arab world, Riyadh would be left with little to spare to cover further disruptions. Escalating Iranian threats to close Hormuz over the last few days are widely seen as saber-rattling by Tehran as its economic crisis deepens. These include the high-profile testing of new anti-ship missiles during large-scale naval maneuvers in the region. But if these were intended to frighten the Europeans from extending sanctions, they didn't seem to have much effect. Indeed, there was a sign Tehran's political leadership, as opposed to the military, was looking for a way out of the confrontation. The government of President Mahmoud Ahmadinejad signaled Saturday it was ready to resume international talks on its contentious nuclear program. That could, of course, be a Tehran ruse to buy some time. Meantime, the military threats mounted. Army commander, Gen. Ataollah Salehi warned Iran wouldn't allow the U.S. aircraft carrier John C. Stennis, which exited the gulf last week, to re-enter the strategic waterway via Hormuz.