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IMF: Halt In Iranian Oil Exports Could Push Global Oil Prices Up By 30%

The International Monetary Fund, or IMF, warned Wednesday that the global oil prices may increase by as much as 30% if Iran decides to halt its oil exports and carries out its earlier threat to block the strategic Strait of Hormuz in wake of the recent U.S. and EU sanctions.

"A halt of Iran's exports to OECD economies without offset from other sources would likely trigger an initial oil price increase of around 20pc-30pc, with other producers or emergency stock releases likely providing some offset over time," the IMF said in a document sent to the Group of 20 leading industrialized nations ahead of their upcoming January 19 meeting in Mexico.

Iran currently produces 5% of global oil output, implying that a halt in oil exports by the Islamic Republic could spike up global oil prices past the peak levels seen during last year's revolution in Libya. Nevertheless, Saudi Arabia has indicated that it was prepared to increase its crude production to compensate any shortfall caused by an Iranian oil export halt.

The IMF also noted in the document that an Iranian blockade of the Strait of Hormuz would escalate the potential crisis, saying: "A blockade of the Strait of Hormuz would constitute, and be perceived by markets to presage, sharply heightened global geopolitical tension involving a much larger and unprecedented disruption."

The Strait of Hormuz, a strategic waterway located at the mouth of the Persian Gulf, links the oil-producing countries of Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates to the Indian Ocean. About 40 percent of the world's tanker-borne oil passes through the waterway.

The IMF warning comes after EU Foreign Ministers agreed at a meeting in Brussels on Monday to ban member-states from importing, purchasing and transporting Iranian crude oil and petroleum products. The EU embargo also extends to related finance and insurance and requires all existing contracts to be phased out by July 1.

The EU Ministers also banned new investments by member-states in Iranian petrochemical companies as well as engaging in joint ventures with such enterprises. The EU also froze the assets of the Iranian central bank within the EU, while ensuring that legitimate trade would continue under strict conditions. The bloc added three more individuals and eight entities to an existing asset freeze and a visa ban.

The United States, Canada and Britain had imposed similar sanctions on Iran late last year. The West hopes that the new sanctions to persuade Iran to rejoin the stalled negotiations with the six world powers over its disputed nuclear program. Although Iran maintains its uranium enrichment work is aimed at producing fuel for a medical-purpose reactor, the West suspects Teheran's claims are just a cover-up for producing weapon-grade uranium.

Iran has already survived four sets of sanctions imposed by the U.N. Security Council following refusal to halt its uranium enrichment, including the one imposed in June 2010. Since then, the six world powers have held two rounds of talks with Iran, once in Geneva in December 2010 and again in Istanbul in January 2011. Both negotiations failed to reach any agreements on the issue.

Although Iran warned soon after the EU announced its latest oil embargo and sanctions that it may block the Strait of Hormuz, the U.S. responded by stressing that it will not tolerate any disruption to oil traffic through the strategic waterway. Several western warships, including a U.S. flotilla led by USS Abraham Lincoln, entered the Persian Gulf through the Strait of Hormuz without incident on Sunday despite Iranian threats against sending aircraft carriers to the region.

The stand-off between the west and Iran over the nuclear issue has already escalated tensions in the region. It has also mounted international concerns about any possible disruption to oil supplies from the Arabian Gulf as such a development could increase oil prices to very high levels amidst a sharp slowdown in world economic growth.

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