Iran's Torpedo Test Drives Up Oil Prices

Carola Hoyos and Gareth Smyth, The Financial Times:

Iran’s announcement that it had tested a new torpedo in war-games in the Strait of Hormuz on Monday pushed international oil prices to their highest levels since Hurricane Katrina.

The news from Tehran, prompting concerns of a possible disruption to supplies, propelled benchmark Brent crude oil futures nearly $2 higher to trade at $67.79 a barrel. READ MORE

Iran’s armed forces frequently carry out extensive military manoeuvres that are given wide coverage on domestic television, but the sensitivity of current naval exercises comes from the 30-day deadline issued last week by the United Nations Security Council for Iran to suspend its atomic programme.

The US Department of Energy calls the Hormuz Strait, which links the Persian Gulf with the Gulf of Oman and the Arabian Sea, “by far the world’s most important oil chokepoint.”

About one in every three barrels of the world’s exported oil travels through the strait and Iran is the world’s fourth-largest producer.

Blocking the straits of Hormuz would be one military option for Iran if the dispute over its nuclear programme were to escalate.

But the use of the oil weapon is double-edged, as Iran is heavily dependent on its own exports, which account for around 60 per cent of government revenue and 80 per cent of export earnings.

In the current military exercises, Tehran has also announced the testing of a radar-evading missile. Iran has three diesel-electric Russian submarines and has started building midget submarines, although there has been greater western concern over its ballistic missile programme.

Mohammad Hadi Nejad-Hosseinian, Iran’s deputy oil minister, on Monday foreshadowed Iran’s ability to influence the oil price, when he said: “Owing to the current situation, any fall in oil prices this year is unlikely...A sum of factors show that prices will not fall in the next two or three years unless there is a conspiracy against oil.”

Adding to the concern over oil supplies on Monday was Nigeria, the world’s eighth-largest exporter, where rebels have shut down about a quarter of the country’s production. Yesterday, Edmund Daukoru, Nigeria’s energy minister said it would take Royal Dutch Shell, the Anglo/Dutch energy group and the country’s biggest foreign producer, a month to restore the bulk of its lost production.

In the US, oil futures prices rose more than $1 to $67.80 a barrel, inching towards the $70.85 record they reached in early September when Hurricane Katrina devastated the US Gulf Coast, the heart of the country’s oil and natural gas production and its oil refining centre.