Iran may threaten to use oil weapon

Iran could threaten to use its oil weapon if Syria gets drawn into the conflict between Israel and Hizbollah guerillas but Arab producers will not withhold their crude exports to exert pressure, analysts said.

"The only oil that could disappear from the market if this crisis develops is Iranian oil," said Mustafa Alani of the Gulf Research Council in Dubai.

"If there is an attack on Syria and if Iran is connected to this attack, militarily or politically, they could decide to stop oil exports for a few days," Mr Alani said.

Tehran has threatened to use its oil exports as a weapon to defend itself in its standoff with the West over Iran's nuclear programme. Iran could face economic sanctions over Western suspicions it is seeking nuclear arms, a charge it denies.

Mr Alani said any use of Iran's oil weapon now would be brief. "It would be a token interruption and not a sustainable one, just to really undermine the psychology of oil markets and to show the Iranian muscle if the question of the nuclear issue begins to be under pressure in the future," he added.

Iran, Opec's second biggest producer, supplies the world with more than 2.4 million barrels per day, making it the fourth biggest exporter.

Traders say a loss of this amount would be hard to replace as, except for about two million bpd of spare crude oil capacity in top exporter Saudi Arabia, Opec is pumping flat out.

Syria and Iran are the main backers of Hizbollah, whose capture of two Israeli soldiers in a cross-border raid sparked attacks on Lebanon.

Iranian President Mahmoud Ahmadinejad warned last week of a "fierce response" if Israel attacked Syria, which exports only about 200,000 bpd of oil.

The worsening conflict helped to send oil prices to record highs over $78 a barrel last week as traders feared the violence could spread across the oil-producing region. Oil held firm above $76 on Tuesday.

Another source of worry for markets is Iran's commanding position on the Strait of Hormuz, a channel at the mouth of the Gulf that is a conduit for roughly two-fifths of globally traded oil. Iran's Supreme Leader Ayatollah Ali Khamenei warned last month that oil exports in the Gulf region could be seriously endangered if Washington made a wrong move over his country. Oil-exporting Gulf Arab states then adopted a contingency plan in case of a blockage of shipping through the mouths of the Gulf and the Red Sea. Saudi Arabia and other US-allied Gulf members of the Organisation of the Petroleum Exporting Countries have made clear in the past that they do not intend to repeat the 1973 Arab oil embargo, which wreaked economic chaos on the industrialised world.

"This is not an option at all," former Kuwaiti oil minister Ali al-Baghli said. "Arab countries decided not to use this weapon again." In 2002, Iraq and Iran called for a one-month ban on oil exports in protest against Israeli incursions into Palestinian territories.

Saudi Arabia and other Gulf states refused, saying oil was not a weapon and that its revenues should be used for the development of Arab countries.

Analysts say the 1970s embargo - sanctioned by Saudi Arabia's then King Faisal to punish the West for backing Israel in the Arab-Israeli war - had backfired because it led to a crash in oil prices, the backbone of Arab economies, and encouraged energy development outside the region.

"I don't think the Arabs will think about this alternative or strategy at any stage or for any reason. They will definitely not cut the oil," the Gulf Research Council's Mr Alani said.