Oil prices, Iranian economic sanctions and the Strait of Hormuz


Just as Russia is feeling the pinch from the drop in oil prices (both leading up to and after OPEC’s decision not to cut production further), Iran is feeling the pinch too (being one of the main countries that desired a cut in production but was rebuffed by Saudi Arabia). It is hardly surprising that Russia sees incentive to engage in increasingly aggressive geopolitical posturing when oil-revenue makes up a substantial part of its income. However, things have been eerily quiet in the Persian Gulf. Iran, being arguably probably in a far worse position, does not have the Russian luxury of nuclear power status or an extremely advanced, formidable Navy that can match the US. However, the Iranian government still has incentive to increase oil prices and it is strategically positioned next to the infamous Strait of Hormuz, one of the world’s most important oil chokepoints.

Iran threatened to shut off the Strait of Hormuz in 2011 in response to US-led economic sanctions but this did little to unnerve markets since there was confidence in the US’s ability to swiftly resolve such an eventuality. Going into 2015, oil prices are forecasted to remain low and often forecast to go even lower. Simply raising tensions around the Strait whilst not actually shutting it off (this could be accomplished by perspicuous naval manoeuvring, aggressive press statements etc.) could quickly escalate into something more if responses are miscalculated and intentions misjudged. Such tensions are really not needed in this fragile macroeconomic and shaky geopolitical climate.

Easing up on at least some of the economic sanctions on Iran (even if they are only token concessions) will enable the Iranian government to at least appear to be in a stronger negotiating position (despite suffering from a very real deterioration in bargaining power from falling oil prices) and it may, thereby, delay or even help prevent possible future aggression. It would also help ensure that cash-strapped citizens across the world enjoy the benefits of cheaper oil for longer whilst decreasing the punishment of Iranian citizens (most of whom have little to no say when it comes to their government’s nuclear program).

Free trade with Iran is unlikely for the foreseeable future but even some token easing of trade restrictions could help preserve our increasingly shaky, threatened (relative) world peace.