Iran’s recent threats to close the Strait of Hormuz have rattled oil markets and increased the risk premium attached to each traded barrel; however, this is likely just the beginning.
The current flare-up follows closely on the heels of a threatened embargo on Iranian oil imports by the European Union and strengthened financial sanctions announced by the United States as the West escalates punitive measures designed to coerce Iran to abandon its nuclear program.
As the standoff over Iran’s nuclear program continues, policymakers should expect Iran to continue to threaten to use oil as a strategic weapon to hold the global economy hostage and deter the West from implementing hard-hitting sanctions. This tradeoff highlights a central consequence of U.S. oil dependence—its impact on foreign policy.
In the case of Hormuz, the West can and will call Iran’s bluff. Iran depends on the Strait as much—if not more than—anyone else. Going forward, look for Iran to expand its unconventional efforts to rattle oil markets and inflict economic damage on oil-consuming nations, which is a win-win for Iran: keep the oil flowing, but at higher prices.