BREAKING: Iran Prepares Military Exercise In Gulf

There is increased Iranian military activity in the Strait of Hormuz, the U.S. Central Command confirmed to Reuters after several U.S. government officials said they believed Iran was preparing to carry out military exercises in the strait. (via OilPrice.com)

“We are aware of the increase in Iranian naval operations within the Arabian Gulf, Strait of Hormuz and Gulf of Oman,” Reuters quoted Navy Captain Bill Urban as saying. “We are monitoring it closely, and will continue to work with our partners to ensure freedom of navigation and free flow of commerce in international waterways,” the Central Command’s spokesman overseeing U.S. forces in the Middle East also said.

The oil price has jumped on the news.

The Strait of Hormuz is a key waterway for the transportation on oil.  Approximately 18.5% of oil travels through the strait.

If Iran were ever to take the dangerous step of blocking ships traveling through the strait via a mining of the waterway, it would
most certainly result in a military response from the United States and a major immediate upward spike in the price of oil.

Last week, I wrote in the EPJ Daily Alert when discussing the Strait:

Laying mines isn't difficult, you basically just toss them into the water as you transit. It would be a very desperate move by Iran but it can not be completely ruled out. It warrants running again a report I first wrote for the ALERT in November 2010: This afternoon I attended a meeting where the speaker was Capitan Jeffrey Kline. Kline is the Program Director, Maritime Defense and Security Research Programs, Naval Postgraduate School. He is an Adjunct Professor at the Naval War College where he teaches, "Joint Analysis for the Warfare Commander". While his speech was about piracy on the high seas, I took the opportunity after his speech to ask him about the Strait of Hormuz. The strait is a very strategically important waterway between the Gulf of Oman in the southeast and the Persian Gulf. A lot of oil passes through the straight, 20% of all world oil trade. You can't spend more than 5 minutes with an oil trader after bringing up the possibility of war with Iran then the closure of the Strait is brought up as a topic. There are many, many opinions as to the whether the strait can be closed. I even heard Boone Pickens (Who knows more about oil than any other man I have met) say at a Michael Milken Conference that he couldn't imagine that the strait could be closed, given that at its narrowest point, the traffic lanes are 6 miles wide. I thought I would ask Kline, who might have a pretty damn good idea, if the Straight could be closed by Iran. His answer was it could. When I asked him how long it would take, he said 3 or 4 days for Iran to position ships and lay mines. He did say that the blockade could eventually be broken, but it would depend upon international co-operation and that it would take "some time". He said that Iran has missiles onshore aimed at the strait that would have to be takenout, and that Iran had other sophisticated equipment in the area including drones that could listen in on ship communications.   He said ship mine sweeping can also get "very tricky". Kline also pointed out that it might not be in Iran's interest to close the strait since Iran ships its oil through the Strait.  But if it does, to panic international oil markets, my read is that it can be done and the strait could be re-opened but it would be a difficult operation, perhaps taking a month at minimum. This information is obviously the type you store away that could become extremely valuable if war breaks out with Iran.

My estimation is that the odds, at present of Iran blocking the strait, is probably less than 10% but if it did happen it would be a very significant event and it is important to understand how it might play out. That said, there are more immediate factors that will put upward pressure on oil prices.

-RW