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Strait of Hormuz issues can cause crude oil prices to rise

The reason of the war in the 1980s between Iran and Iraq was the Strait of Hormuz. If Iran plans to block it, there could be a military strike from USA on Iran, says Alastair Newton, Chief Political Analyst at Nomura.

February 23, 2012 / 03:47 PM IST

The reason of the war in the 1980s between Iran and Iraq was the Strait of Hormuz. If Iran plans to block it, there could be a military strike from USA on Iran, says Alastair Newton, Chief Political Analyst at Nomura. This will lead to a spiralling of oil prices to 130 USD per barrel after corrective action.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: You have made some key points in your report dated 10th February about the influence of the political cycle in Israel and US over the prospects for military strike against Iran's nuclear programme this year. Can you elaborate on the various political and election scenarios that could happen over the next few months that may or may not trigger a strike?

A: The first thing to say is that I do not think that Premier Netanyahu in Israel will want to launch a military strike in the immediate run up to Israeli general election. If things were to go wrong with the operation, that could be bad news for him electorally. Israel does not need to have a general election until September-October of next year.

However, in January Netanyahu called a snap liquid leadership primary, waiting quite convincingly, which effectively clears a way for an early election. Now were Israel to have an early election there would be a window between them and the US presidential election on 6th November, which may provide Netanyahu the best window of opportunity politically to launch a strike against Iran.

The point here is that Netanyahu and the American President Barack Obama don't get on particularly well although I would expect to see them preparing over the cracks in Netanyahu's visit to Washington scheduled for early next month. The Americans are very keen that the Israelis not do this nevertheless in the run up to the US Presidential elections.

It would be a very brave candidate in the US to condemn Israel or not even support Israel for launching a military strike. Since Iraq is widely perceived in the US and indeed in Israel as being a potential existential threat to the state of Israel. I would only put about a 30% probability of this operation happening during the course of the next 12 months but that is still higher than last year and in any previous year

Q: You put it a 30% probability but you have also said that events in Iran may precipitate an early strike. What are those events that could in fact increase that probability ratio from 30% to higher?

A: The key issue is if the Iranians accelerate their nuclear related activity at the new facility at Fordow, which is deemed by most experts including Israeli defence minister; Ehud Barak to be more or less attack proof as far as bombing is concerned.

The Iranians have made noises to the fact that they are going to setup a major enrichment facility there. They did rollout this new generation facility just a few days ago although it remains to be seen how effective those are. Iran has already crossed a great many declared redlines without Israel reacting by a military strike.

There is no guarantee that Fordow would prove to be a definitive redline. For the more Iran can probably mitigate the risk of attack by coming back to negotiating table and not withstanding what you said in introductory remarks correctly about the disappointment of the IEAE visit this week. There are clear signs that the Iranians will be preparing to come back to the P5+1 format which was on ice for the last few months.

There are also clear signs that the Americans and indeed the Europeans would welcome that. We may see a return to negotiations but I have to say based on that track record that I am extremely sceptical about Iran using the negotiations for any purpose other than to play for time.

Q: How is the oil embargo going to play into this situation considering the kind of economic hardship that it would add to Iran's current problems? There is already a hostile situation by Iran in response to Europe's sanctions, which kick in in about 3 months

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