The location of the attacks was key.  This time the attacks were near the Strait of Hormuz, the world’s busiest sea lane for oil shipment.  Almost 30% of the world’s traded oil is shipped through the Strait, mainly to destinations in Asia such as Japan, India and China.  The Strait is 60 miles across, but shipping channels are only two miles across making tankers very vulnerable to attacks from torpedoes or mines. 

Further escalation would cause oil prices to rise even more.  It is very possible that the United States will respond to the attacks by increasing its presence in the Strait.  Such a move could escalate tension in the area, as well as the likelihood of further attacks.  Should the United States respond with an aerial attack on Iran, oil prices will undoubtedly rise.  A senior Iranian military official warned on June 2^nd that any rocket attack would hike up the price of oil above $100 per barrel.

This has happened before and then died down.  The attacks bore similarities to sabotage activity on May 12^th, which was followed by claims from Iranian officials that the Strait of Hormuz would be shut down.  In fact, Iranian officials have threatened to close the Strait of Hormuz five times in the last eight years.  Each time, the United States reacted by increasing its presence in the area and the attacks ceased.  One would have to go back to 1998 to find a significant response by the United States.  After a U.S. frigate was damaged by an Iranian mine, the United States responded by sinking or severely damaging half of Iran’s operational fleet.

Iran may be standing alone.  The United States has indicated that any attempts to close the Strait of Hormuz would be viewed as an act of war.  With the majority of oil in the Persian Gulf being shipped to India, Japan and China; the United States would have powerful allies in any conflict with Iran.  When Iran threatened to close the Strait of Hormuz in 2012, it backed off its threats after a stern warning from China’s then-premier, Wen Jiabao. 

The United States can increase oil production, if oil prices remain high.  Independent producers in the United States have identified tens of thousands of prospective drilling locations.  Some of these are economical only at higher oil prices.  Should oil prices remain at high levels, we would expect companies to increase their drilling efforts to offset any drop in supply.  This would dampen the rise in oil prices, at least domestically.