Iran threatened on Tuesday to stop the flow of oil through the Strait of Hormuz if foreign sanctions were imposed on its crude exports over its nuclear ambitions, a move that could trigger military conflict with economies dependent on Gulf oil.
Western tensions with Iran have increased since a November 8 report by the U.N. nuclear watchdog saying Tehran appears to have worked on designing an atomic bomb and may still be pursuing research to that end. Iran strongly denies this and says it is developing nuclear energy for peaceful purposes.
Iran has defiantly expanded nuclear activity despite four rounds of U.N. sanctions meted out since 2006 over its refusal to suspend sensitive uranium enrichment and open up to U.N. nuclear inspectors and investigators.
Many diplomats and analysts believe only sanctions targeting Iran's lifeblood oil sector might be painful enough to make it change course, but Russia and China - big trade partners of Tehran - have blocked such a move at the United Nations.
Iran's warning on Tuesday came three weeks after EU foreign ministers decided to tighten sanctions over the U.N. watchdog report and laid out plans for a possible embargo of oil from the world's No. 5 crude exporter.
If they (the West) impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz, the official Iranian news agency IRNA quoted Iran's First Vice President Mohammad Reza Rahimi as saying.
The U.S. State Department said it saw an element of bluster in the threat but underscored that the United States would support the free flow of oil.
It's another attempt to distract attention away from the real issue, which is their continued non-compliance with their international nuclear obligations, spokesman Mark Toner said.
Rahimi's remarks coincided with a 10-day Iranian naval exercise in the Strait and nearby waters, a show of military force that began on Saturday.
Our enemies will give up on their plots against Iran only if we give them a firm and strong lesson, Rahimi said.
EU ministers said on December 1 that a decision on further sanctions would be taken no later than their January meeting but left open the idea of an embargo on Iranian oil.
Countries in the 27-member European Union take 450,000 barrels per day of Iranian oil, about 18 percent of the Islamic Republic's exports, much of which go to China and India. EU officials declined to comment on Tuesday.
About a third of all sea-borne oil was shipped through the Strait of Hormuz in 2009, according to the U.S. Energy Information Administration (EIA), and U.S. warships patrol the area to ensure safe passage.
Most of the crude exported from Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq - together with nearly all the liquefied natural gas from lead exporter Qatar - must slip through the Strait of Hormuz, a 4-mile (6.4 km) wide shipping channel between Oman and Iran.
Iran has also hinted it could hit Israel and U.S. interests in the Gulf in response to any military strike on its nuclear installations - a last resort option hinted at by Washington and the Jewish state.
However, some analysts say Iran would think hard about sealing off the Strait since it could suffer just as much economically as Western crude importers, and could kindle war with militarily superior big powers.
To me, if Iran did that it would be a suicidal act by the regime. Even its friends would be its enemies, said Phil Flynn, analyst at PFG Best Research in Chicago.
Industry sources said on Tuesday No. 1 oil exporter Saudi Arabia and other Gulf OPEC states were ready to replace Iranian oil if further sanctions halt Iranian crude exports to Europe.
Iranian Oil Minister Rostam Qasemi had said that Saudi Arabia had promised not to replace Iranian crude if sanctions were imposed.
No promise was made to Iran, its very unlikely that Saudi Arabia would not fill a demand gap if sanctions are placed, an industry source familiar with the matter said.
Gulf delegates from the Organization of the Petroleum Exporting Countries (OPEC) said an Iranian threat to close the Strait of Hormuz would harm Tehran as well as the major regional producers that also use the world's most vital oil export channel.
Oil prices spiked on Tuesday, fuelled by fears of supply disruptions and Iranian naval exercises in a crucial oil shipping route, with gains capped by simmering euro zone debt concerns.
Brent crude oil futures jumped more than a dollar to over $109 a barrel after the Iranian threat, but a Gulf OPEC delegate said the effect could be temporary. For now, any move in the oil price is short-term, as I don't see Iran actually going ahead with the threat, the delegate told Reuters.
The industry source said that in the case of EU sanctions, Iran would most likely export more of its crude to Asia, while Gulf states would divert their exports to Europe to fill the gap until the market is balanced again.
A prominent analyst said that if Iran did manage to shut down the Strait of Hormuz, the ensuing spike in oil prices could wreck the global economy, so the United States was likely to intervene to foil such a blockade in the first place.
First, the U.S. will probably not allow Iran to close the Strait. That's a major economic thoroughfare and not just for oil. You shut that Strait and we are talking a major hit on many Middle East economies, said Carl Larry, president of Oil Outlooks in New York.
Second, there is no way that the Saudis (alone) have enough oil or quality of oil to replace Iranian crude. Figure Saudi spare capacity is 2 to 4 million at best. Of that spare, about 1-2 million is real oil that is comparable out of Iran. Lose Iran, lose 3.5 million barrels per day of imports. No way.
French President Nicolas Sarkozy proposed hitting Iran with an oil embargo and won support from Britain, but resistance to the idea persists within and outside the European Union.
An import ban might raise global oil prices during hard economic times and debt-strapped Greece has been relying on attractively financed Iranian oil.
Iran's seaborne trade is already suffering from existing trade sanctions, with shipping companies scaling down or pulling out as the Islamic Republic faces more hurdles in transporting its oil.
(Additional reporting by Parisa Hafezi in Tehran, Dmitry Zhdannikov in London, Robert Gibbons and Janet McGurty in New York, Amena Bakr in Dubai, Andrew Quinn in Washington; Writing by Mark Heinrich; Editing by Jon Boyle and Alison Williams)