Is Iran’s threat to close the Strait of Hormuz really just huffing and puffing?

Is Iran’s threat to close the Strait of Hormuz — the seaway chokepoint for some 17 percent of the world’s daily oil supply — as empty as its vow to wipe Israel off the face of the Earth? Oil traders by and large think so — a day after Iranian Vice President Mohammad Reza Rahimi issued the threat, global oil prices were sharply lower.

Traders say the main reason for their non-chalance is the extent of U.S. military forces deployed in the area. The idea is that, if Iran mines the waterway — which links the Persian Gulf with the Indian Ocean — or harasses oil tankers with its fast patrol boats (such as the one pictured above), the U.S. Navy will swiftly come to the rescue.

At the Financial Times, Najmeh Bozorgmehr and Javier Blas say we may be witnessing a reflection of Iranian politics ahead of March parliamentary elections.

Yet the characters in this latest Persian Gulf drama are among the most unpredictable on the big geopolitical chessboard. While Iran may very well be simply huffing and puffing, it is not out of the question that it would, as it has before, make trouble for oil traffic in the Strait. If it does, that would be serious stuff because of those who are dispatching the 13 oil and liquefied natural gas supertankers that ply Hormuz every day — in addition to Iran, they are Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates.

In his daily note to clients today, Connecticut-based oil analyst Peter Beutel steps away from the machismo of other traders, and notes the stakes should Iran make good on its threat: "Under any scenario, [it] would be a game-changer.  It could keep millions of barrels a day from moving out of the Petroleum Gulf — perhaps as much as 19 million barrels per day — and would instantly draw all consuming nations into opposition with Tehran. The U.S. and its Arab allies would be compelled to open [the strait] by military force."

I remarked last week on the poor record of sanctions in terms of achieving foreign policy objectives. But the West is hung up because, notwithstanding the lobby that earns a living by urging war with this or that country, there is very little upside, and much in the way of downside, in any military solution. So if you wish to forestall a nuclear-armed Iran, and war is too risky, sanctions are about all there is.

Iran’s threat in part is rooted in the latest stages of Western actions following a November update on Tehran’s nuclear development. The idea is not to stop Iranian oil sales, in the logic that that would probaby drive up global prices, but to reduce Tehran’s crude oil income. U.S. legislation awaiting the signature of President Barack Obama would allow the U.S. to penalize any foreign entity paying Iran for oil, supplementing an already-existing ban on U.S. companies carrying out such transactions. And the European Union says it is on track to vote similar sanctions at the end of next month.

There is something that is vaguely amusing about this kabuki. If the West were truly serious, it would bite the bullet and sanction any legal oil payment to Iran for its 2.4 million barrels a day of exports. The truth is that a lot of this volume would leak onto the market thanks to smugglers, but Iran would have to sell it at a discount, thus losing a lot of its income (its 2010 oil income was about $81 billion).