'Iran’s Real Weapon of Mass Destruction'

"... Iran’s weapon of mass destruction is not speedboats or cyber warfare, let alone non-existent nuclear weapons: it is the price of oil. And to use it, Tehran doesn’t even need to close the Strait of Hormuz. If all the international sanctions are applied, about 2m barrels of Iranian oil a day would disappear from the market by mid-2012. Saudi Arabia has indicated that it would increase production, and Libyan production is coming back on line, which would help. The US and others (mainly European) could also open their strategic reserves to make up some of the shortfall.

However, Europe would have to replace some 600,000 barrels of oil that it imports daily from Iran, and much of that demand is centred on the three most vulnerable economies: Greece, Italy and Spain. Their Iranian imports are presently based on barter arrangements and relatively inexpensive long-term contracts, which will be difficult to replace at the same price or quality. New contracts must be negotiated, alternative suppliers brought on line and refineries recalibrated.

Will this transformation work seamlessly, without a significant net increase in the price of oil? In January, as Iran and the US exchanged threats over the Strait of Hormuz, the price of oil increased by more than 6% and then stabilised near this higher level, without a shot being fired or any new sanctions implemented. All increases, as everyone knows, affect not just the (politically sensitive) price of petrol but virtually everything that is manufactured and transported.

Imagine the following scenario just four months from now: as the world scrambles to replace Iranian oil, and as Iran finds it increasingly hard to sustain its national revenues, the oil market is trending higher. Just at that moment, there are unexplained explosions at pipelines and oil loading points in the south of Iraq, removing another million barrels per day from the market. At the same time, there are mysterious breakdowns in Saudi and Kuwaiti refineries, and oil loading operations in the United Arab Emirates are impaired, due to unforeseen technical difficulties, perhaps related to computer controls, or to sabotage by Iran. It is impossible to predict how high the price of oil would go and how long it would stay there...."