Iran's Bluff?

What will the Mullahs really do if push comes to shove?

Iranian leaders are threatening to close the Strait of Hormuz to international traffic, and on Wednesday the parliament passed a law “forbidding” foreign warships to enter the Persian Gulf.

These moves came as the United States and Europe consider moves that will dramatically increase the economic and diplomatic pressure on Tehran – moves that already have caused the Iranian currency to lose more than half of its value, plunging from 10,500 rials to the U.S. dollar last month to around 18,000 rials on Monday, before recovering to around 15,500 on Wednesday.

On Dec. 31, President Obama signed a Defense Authorization bill that includes comprehensive new sanctions against Bank Markazi, Iran’s Central Bank. Existing sanctions against Iranian commercial banks have forced Iran over the past two years to increasingly take payment for its oil exports – the overwhelming hard currency income for the regime – through Bank Markazi.

While loopholes in the legislation exist that Obama has pledged to exploit, the National Iranian American Council – a group that consistently reflects the concerns and policy goals of the Iranian regime – lobbied hard against it.

Most significant among NIAC (and Tehran’s) worries is the potential that “Tehran could find itself unable to execute oil sales,” a NIAC briefing paper warned.

But that is precisely the reason Congress finally took the step of imposing a worldwide ban on Iran’s Central Bank after years of hand-wringing that such a move would drive up oil prices and impinge upon the president’s ability to conduct foreign policy.

“Without immediate and serious action, the Islamic Republic of Iran will have a nuclear weapons capability in the near future," Senator Mark Kirk said when he filed the amendment in November. "As the world's leading state sponsor of terrorism, it's quite likely that the Iranian regime would transfer its nuclear weapons to terrorist organizations like Hezbollah and Hamas. And we can be sure that an Iranian bomb will set off a nuclear arms race in the Middle East - from Saudi Arabia to Egypt. We must act now or face the consequences of a nuclear Iran."

So what will Iran really do if push comes to shove? And how will the increased tensions affect the price of oil?

Scenario 1: Iran attempts to close the Strait of Hormuz.

The Iranian navy could attempt to use its Russian-made Kilo-class diesel-electric subs and smaller home-made Ghadir-class boats to torpedo ships entering the narrow sea lanes of the Strait, or try a repeat of its 1988 effort to mine the Strait.

Iranian leaders have made many threats recently that this is what they will do, boasting like drunken sailors that closing the Strait is a simple matter they could undertake with no preparation that would devastate world oil markets and exacerbate the international economic downturn.

But most analysts believe such a move would provide an acceptable excuse for the U.S. Navy to unleash its overwhelming firepower against Iran, sinking the majority of Iran’s major surface ships, knocking out its coastal artillery and anti-shipping missile batteries, and perhaps sinking offshore oil platforms, as during Operation Praying Mantis in April 1988.

“If the Islamic Republic wants to commit suicide, then by all means, close the Strait of Hormuz right away,” the Washington Times editorial page remarked recently.

Consequence: oil prices increase sharply for several days, then drop like a rock. Iran loses.

Scenario 2: Iran uses “swarming” attacks against U.S. warships in the Persian Gulf.

When the USS John C. Stennis or another U.S. carrier attempts to re-enter the Persian Gulf (which the U.S. Navy sometimes refers to as the “Arabian” Gulf), Iran could carry out its threat to attack – not using large surface ships or missile boats, but with swarms of small “go-fast” boats armed with Revolutionary Guards troops and shoulder-launched weapons.

Such attacks could have dramatic success. U.S. planners have been worried about this since at least 2002, when they had to halt a war -gaming exercise after Iranian go-fast boats sank the majority of the U.S. fleet.

Since Iran’s naval forces were reorganized in 2007 and responsibility for inside the Persian Gulf handed over to the IRGC Navy, the Rev. Guards have been “adding and upgrading its inventory of high-speed vessels with missile and torpedo capabilities,” writes Navy Commander Joshua C. Himes.

In addition to a new domestic production line for Bladerunner go-fast boats, and a dozen Bazvar 2 stealth flying boats, Iran is now seeking to increase the top speed of existing go-fast boats “from 55 knots to 80-85 knots, along with increasing balance and maneuverability designed to enable cruise-missile and torpedo capabilities,” Cmdr. Himes writes.

A swarming attack that sank a major U.S. warship could have catastrophic consequences, undermining confidence in U.S. naval power and emboldening Iran to attempt a selective blockade of the Strait of Hormuz.

Consequence: oil prices increase dramatically. U.S. loses credibility. Iran wins.

Scenario 3: Iran is bluffing and does nothing

The most likely scenario, based on past experience, is that Iran is hoping that incendiary statements will scare Western countries to walk back sanctions against Iranian oil and against the Central Bank, or at least to not enforce them.

President Obama added fuel to such hopes in his signing statement on New Year’s Eve, when he indicated he didn’t intend to impose the sanctions on Bank Markazi because they infringed on the power of the executive to conduct foreign policy.

The Wall Street Journal has been touting just such a scenario in its reporting and online video analysis. In one clip, Dow Jones Reporter Benoit Faucon, discounted the U.S. and European moves. “In some way, it is a bluff, because nothing practical has happened yet,” he said. “It’s a formidable chess game between Obama and Khamenei.”

In a separate clip, the Journal’s Daniel Strumpf said he believed Iran would back down. Noting that nothing would happen in Europe until the Jan. 31 EU foreign ministers meeting in Brussels, he expected the Iranians to back off to preserve the markets, since “the demand is not there for $4 gas.”

If the U.S. and the EU go through with sanctions on the Central Bank, oil prices will bump up and down following the trajectory of Iranian threats. After a few weeks prices will settle back to acceptable levels (around $100/barrel) once it becomes clear that Iran is not about to initiate hostilities.

As the months go by, however, an increasingly cash-strapped Iranian regime could face renewed domestic unrest, especially as Iranians prepare to go to the polls in March to elect a new parliament.

Consequence: Oil prices remain relatively stable; Iran loses.

Nervous Nellies who swallow the bluster from Tehran get hysterical whenever the U.S. has two aircraft carriers inside the Persian Gulf. For some reason, they believe the U.S. Navy would signal its intent to launch an imminent strike on Iran by making such an overt move.

On the contrary, I have always believed that the real opening to a military strike on Iran would be just the opposite: pulling our big warships out of the Persian Gulf into the relative safety of the Arabian Sea or the Indian Ocean.

That is precisely what the U.S. Navy did this week.

Is the U.S. about to attack Iran? If I knew the answer to that question, I couldn’t tell you.

But if I were a U.S. military planner, I would be analyzing events from Tehran’s eyes, as I tried to do in the three scenarios above. And out of an abundance of caution, I would be pulling my assets out of harm’s way – not because I had an intention to attack Iran, but because I believed the Iranian regime might calculate they had to strike first, or die.

Stay tuned.

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