At first blush any notion of rising tension in the Persian Gulf, or Arabian Gulf if you sit on the otherside, is obviously bad news for the Gulf States. Iran in a corner could prove a dangerous neighbor and a naval conflict over the Straits of Hormuz is possible. Then again this would force oil prices higher and for those oil producers still able to export crude this would mean windfall revenues.
However, Iran is always very reluctant to take action that would cripple its own economy. It’s economic suicide for the Islamic Republic to close the Straits because then it cannot sell oil either. Whatever the multifarious regional objectives of Iran, destroying its own economy is not one of them. Oil is what makes the dysfunctional Islamic Republic run, however inefficiently and with a much lower standard of living than could be achieved as a part of the global economy.
For the Islamic Revolution may well have met its own social and religious objectives but rather like the communist ideology in Russia it is a clear and irrefutable economic failure. Latterly it is the obsession with the pursuit of its nuclear program that has worsened Iran’s economy still further because of the Western response. The Western powers have gradually racked up sanctions to pressure the regime to abandon this program which they fear will leave terrorists with the atomic bomb.
In 2012 the US and European Union have gone for the jugular in taking measures that impact Iran’s oil sales, banning oil purchases outright and sanctioning the central bank. An EU embargo of Iranian oil sales is probably next.
Iran’s response is not so unreasonable. If Iran cannot export oil through the Straits of Hormuz why should any other Gulf oil producer? But then that rhetoric implies force to back it up and the Iranian navy is to put it politely not quite on a parr with its opponents. So if closing the Straits looks like economic suicide for Iran, the same might also be posited about the likely military outcome.
Higher oil prices
In the meantime oil prices stay high when a recession in the EU ought to be lowering them. This is good news for the Gulf Oil States, although they are always weary of being too offensive to Iran just in case the Western powers one day leave them on their own.
The more difficult choices are clearly those now faced by Iran. A trump card would be to play the nuclear option and allow inspectors to verify claims that no military application of this technology is under development. Then the sanctions would have to go. That would be good for the peace and stability of the region, especially if it resulted in a more business-friendly Iranian regime that would start to rebuild its crippled economy.
Until then there is always the worry that a military accident could trigger a tragedy and the Arabian Gulf States are far too close for comfort whatever the impact on oil revenues this year. Still a positive resolution of the Iranian nuclear issue would deliver economic benefits all round even if the oil price was a bit lower as a consequence.