The Strait of Hormuz lies between Iran and the United Arab Emirates, providing passage for some 15.5 million barrels of crude oil per day, amounting to one third of the world's seaborne oil shipments. In a word, it is a 34-mile-wide chokepoint, making Iran's threat this week to shut down the strait all the more serious for the global community.
The Iranian regime's provocative warnings came on Tuesday from Iranian First Vice President Mohammad Reza Rahimi who threatened to close the strait if Iran faces sanctions for its nuclear ambitions. And Wednesday, Iran's top naval commander Habibollah Sayyari said, "Closing the Strait of Hormuz for Iran's armed forces is really easy ... or, as Iranians say, it will be easier than drinking a glass of water."
Iran's closing of the strait -- and its economic ramifications -- is a scenario that has been contemplated before. From December 2006 to March 2007, Heritage Foundation scholars conducted a computer simulation and gaming exercise that examined the likely economic and policy consequences of a major oil disruption in the Persian Gulf. Specifically, the war game was based on a scenario in which Iran began blockading the Strait of Hormuz in January 2007.
What did they find? Based on their modeling, if Iran succeeded in fully blockading the strait for up to one week, Americans would see a massive spike in oil prices, a one-quarter drop in GDP of $161 billion, the loss of one million jobs, and a drop of real disposable personal income costing more than $260 billion.
With those threats at hand, the scholars recommended a series of steps to manage the theoretical blockade and its worldwide economic consequences:
A focused but restrained use of military power oriented toward objectives that address vital national interests would demonstrate U.S. determination to uphold freedom of navigation in the Strait of Hormuz, help to calm global markets, and reassure American consumers, and measures liberalizing energy policies and rolling back regulatory restrictions would allow the marketplace to work to meet global energy needs.
At the time this war game analysis was conducted, the scholars described why a potential blockage of the Strait of Hormuz would be such a significant threat. Their words ring true today. They looked back to the energy crises during the Arab oil embargo in 1973-1974 and the Iranian revolution in 1978-1979 -- both of which led to fuel shortages, long gas lines, gasoline rationing, high inflation, and energy-related damage to the overall economy.
In those instances, they wrote, America suffered not only as a result of the changes in global oil supply, but also because of policies emanating from Washington:
At almost every turn, Washington policymakers exacerbated the already challenging energy situation with their own policy blunders. The federal government's newly created maze of economic and environmental regulations and implementing agencies greatly hampered domestic energy supplies and limited the private sector's ability to respond to events.
In retrospect, the U.S. government probably caused at least as much harm as any foreign entity did. Much of the energy crisis was self-inflicted by bad decisions made in Washington. The errors of the 1970s should serve as a cautionary tale as America again faces similar energy challenges.
Today, Washington is throwing up similar roadblocks to energy independence. President Barack Obama has postponed a decision on the Keystone XL pipeline, which would transport 700,000 barrels of oil per day from Canada to refineries in Texas, and give a major boost to the U.S. economy. Meanwhile, his Administration has blocked access to shale resources and slowed down and even halted offshore drilling in the Gulf of Mexico, which supplies 30 percent of domestic oil production. And the Environmental Protection Agency is imposing new, costly regulations on energy production. And all of this comes as Iran is threatening to cut off a quarter of the world's energy supply.
As Heritage's war game analysis showed, there are things America can do to respond to such provocations from Tehran, but no actions can totally eliminate the economic consequences. However, there are things Washington can and should do today to help America become less dependent on the Middle East for its energy and soften the blow should Iran choose to lash out at the West. America's security depends on it.