Margareta Pagano: Straits stand-off could sink fragile growth in Europe

Midweek view: Saudi Arabia and Israel, for different reasons, hate Iran, while
the US hawks want regime change in the country

Six warships from the United States, Britain and France are on standby
patrolling the Straits of Hormuz, the entrance to the Persian Gulf from where a
fifth of all the world's oil exports comes through by ship.

Six warships from the United States, Britain and France are on standby patrolling the Straits of Hormuz, the entrance to the Persian Gulf from where a fifth of all the world's oil exports comes through by ship.

Messrs Sarkozy and Cameron, together with Mrs Merkel, are threatening to impose unprecedented economic isolation and an oil embargo on Iran unless it abandons its nuclear ambitions quickly. In turn, the Iranian regime is threatening to close the Straits and once again there are fears Israel will lead the way with a strike against the Iranians if they don't back down.

Yet, despite all this sabre-rattling, the oil price has hardly budged. It's astonishing but it's still sticking in the $112 a barrel range where it has been over the last few months.

Even the stock markets seem remarkably blasé. Oil traders appear to be confident that if the sanctions go ahead, the gap in supply will be made up by Saudi Arabia.

But an embargo on Iran's oil will hurt us all in different ways; but it may well hurt us in the West more than it hurts them. It's the world's fifth-biggest supplier, producing about four million barrels a day. Approximately 20 per cent of Iran's total oil comes to EU countries – about 600,000 barrels a day are imported, interestingly by Greece, Spain and Italy, Europe's most vulnerable countries.

One of the reasons they import from Iran is precisely because they are vulnerable – they get better credit arrangements from the Iranians. Existing oil contracts can continue but the EU is banning any new ones after July.

This means that Greece, Italy and Spain have quickly got to get new oil sources, not easy in current circumstances. Another worry is that Iran may hit out first with its own pre-emptive strike and stop supplying the oil already promised.

Louise Cooper, a market analyst at BC Partners, said countries such as Greece could be hit hard if Iran were to stop supplying oil which is already on order: "Even traders are surprised at how the oil price hasn't shot up yet, suggesting this could be because they have a greater appetite for risk as the world economy is looking a little brighter and it's the beginning of the year for trading books. Or it's because they haven't woken up to the dangers yet."

Oil analysts suggest Iran can get around the ban because it will sell more to China and the East. It will also be able to get oil out of the country via pipelines to Turkey and Egypt. Iran will probably have to offer discounts, which would add to pressure on the nation's finances.

In the past month alone, Iran's currency – the rial – has already lost about 20 per cent of its value over fears that this latest crisis could turn into a global conflict. As a result, food prices and other consumer goods have rocketed, and an already frustrated population is facing greater hardship.

It's going to take a few months for these sanctions to take effect, but the only relevant question to ask is whether they will have an impact at all on changing Iran's nuclear policy. If past experience of sanctions is a guide, then the answer is no.

There is also the danger that the Western ships in Hormuz will only serve to unite the Iranian population against the regime, and steel President Ahmadinejad's resolve for a fight. Is that what the West wants?

There's a danger the bellicose statements from Messrs Cameron and Sarkozy are just a cover for the real geopolitics in the region: Saudi Arabia and Israel, for different reasons, hate Iran, while the US hawks want regime change in the country.

Economic sanctions are not the clever way to win over the Iranians, and could hurt Europe's already fragile growth prospects more than we can imagine.

Jaw jaw, not war war has to be the best approach.

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