01/06/2012 03:22 pm ET Updated Mar 07, 2012

Gunboat Diplomacy: A Maritime Field Guide to the Straits of Hormuz Crisis

You may be about to feel more pain at the pump courtesy of the atomic ayatollahs' latest gunboat diplomacy to counter the impact of the November 8 IAEA report revealing the extent of Iran's nuclear bomb making ambitions.

To guide you through the growing crisis, here is my Maritime Field Guide to all things "Hormuz."

Tehran is actually using one of its last trump cards to undertake the naval equivalent of a "Hail Mary Pass" to thwart tightening economic sanctions against it. Late December '11, Iran's Naval Commander Habibollah Sayyari issued yet another in a long line of Iranian threats to torpedo oil traffic through the strategic Straits of Hormuz if the European Union keeps to its plan to stop importing Iranian oil (Iran accounts for 8.5% of oil imported by the EU). To add more flair to the threat, for the past ten days Iran has been flaunting its military might in the Persian Gulf during Velyat 90 naval exercises which included a test fire of a new surface-to-surface anti-ship cruise missile termed the "Ghader" ("Capable" in Farsi) and a surface-to-air missile dubbed the "Mehrab" ("Altar" in Farsi) .

Just as Tehran hoped, the sabre-rattling accompanied by souped-up videos of the exercises spiked world oil prices to over $114 a barrel for a few days ("...easier than drinking water from a glass," proclaimed the boastful Habibollah). Then just to ratchet up the temperature higher Iran's official news agency blustered that its parliament would take up legislation to prevent American warships from traversing the Straits following a warning from Iran's Revolutionary Guards Commander that Iran would prevent the USS John C. Stennis -- one of the 5th Fleet's aircraft carriers, from returning to the Persian Gulf.

Is Iran bluffing? Hard to tell. No matter the cost to its own oil exports revenue, Tehran may be calculating that a limited shooting war in the Straits would wreak such economic havoc on world oil prices that the global impact would thwart designs by either the U.S. or Israel to attack its nuclear installations given the predicted outcry as prices skyrocket at the pump.

1. The Skinny on the Straits

Approximately 35% of world oil supplies pass through the 34 mile wide waterway each day (16.5 million barrels loaded on about 15 supertankers departing from Iraq, Kuwait, Saudi Arabia and Iran). Technically, ships must enter the waters near Iran and Oman to traverse the Straits lying between the Persian Gulf and the Arabian Sea. The passage has two north-south shipping lanes to separate northbound and southbound tanker traffic, even though there has been the occasional collision. The Straits derive their name from the Persian God Hormoz.

2. Tanker Wars & Ongoing Confrontations

During the Iran-Iraq War (1984-1988), each side attacked the other's oil installations and tanker traffic in the Persian Gulf, reducing oil exports through the Straits by 25%. Neutral oil tankers were also attacked by each of the combatants and the threat to global oil exports from the Gulf became acute, which threatened to bring in all of the other Gulf states into the conflict. The Iranians threatened to choke off the Straits of Hormuz to oil tankers, and even attacked a Saudi tanker in Saudi territorial waters which led to a dog fight between the Saudi and Iranian air forces (the Saudis got the better of the fight). In March, 1987, The U.S. Navy started escorting re-flagged Kuwaiti tankers, and in one engagement Iraq (not Iran) actually severely damaged the USS Stark on May 17, 1987 killing 37 sailors and wounding 21 more. In 1988, the U.S. Navy waged a one-day battle against Iranian naval forces in the Straits in retaliation for the mining of the USS Samuel B. Roberts.

When Iran threatened to block the Straits, the U.S. threatened to declare war against Iran if it dared to do so. The Tanker War resulted in damage to 546 commercial ships and killed 430 merchant marine men.

After the so-called Tanker War, the U.S. and Iran have had at it often in the Straits. In December, 2007 and January, 2008, a game of "chicken" between the 5th Fleet and Iranian naval speedboats broke out when Tehran began menacing U.S. ships in the Persian Gulf, although there were no hostilities as a result.

3. Does Iran Possess the Military Clout to Disrupt Shipping Through the Straits?

There is a big difference between Iran's ability to disrupt shipping temporarily and its ability to plug the Straits completely for extensive periods of time (nevertheless, the former would still have major economic impact on oil prices as well as shipping insurance costs).

Keeping the Straits open in the face of a concerted Iranian attack would be no cakewalk. Iran, with a coast line of 1,300 miles littoral to the Straits, has dramatically increased its naval assets around the Straits to counter the U.S. 5th Fleet. It has a major naval base and its key submarine base near the Straits. Iran also possesses thousands of sea mines, wake homing torpedoes, the aforementioned cruise missiles, and possibly more than a thousand small Zolfaqar speedboat Fast Attack Craft and Fast Inshore Attack Craft which can reach 80 mph, which already carries the Nasr anti-ship missile. Iran already possesses armed drones and mobile shore-based missile batteries ringing the area around the Straits. Iran's are also masters of the suicide naval and air mission. In other words, it has the means to make life miserable in the strategic waterway.

4. And That Price of Oil?

If Iran (which itself exports 2 million barrels a day through it and derives 85% of its hard currency) were to block the Straits, the price of world oil would likely rise $50 a barrel (to over $150 a barrel based on today's Brent crude baseline prices), pushing the price of a gallon of unleaded regular gas well over $4 in no time. This is so even though 85% of the oil and natural gas that flows through the Straits goes to China, Japan, India, and South Korea. Increased shipping insurance premiums would keep those elevated oil prices even higher. With Libyan crude exports beginning to reach the market and promised increased in Saudi oil exports to cushion the loss of Persian Gulf oil exports, prices may not reach the OMG level, but no one knows for sure. The EU will unveil its phased oil embargo on January 30... stay tuned.

5. What to Do?

a. Empty posturing or not, Iran's threat has to be taken seriously and Iran's unpredictability has to be taken seriously. Iran has no legal claim to the Straits (a recognized international waterway), and there is ample historical precedent for international action to preemptively prevent vital global waterways from arbitrary blockade (e.g, Straits of Tiran circa 1967). While the U.S. has unilateral resort to its 5th Fleet, Iran is itching to pick a fight with Washington to gain world sympathy and there is no good reason to oblige them. Better to form an international flotilla (NATO plus Persian Gulf states) which would be deployed in the Straits ASAP to counter any Iranian moves to block the passageway.

b. Embargo oil distillates to Iran to prevent Iran from refining its crude oil into refined gasoline. True, it is a punishment that will mainly hit its citizens, but no economic sanctions are going to take dinner off the ayatollahs and its time to get the population more riled up against Iran's leadership.

c. Keep the pressure on by tightening the noose around Tehran's central Merkazi Bank. This is the financial jugular vein for the regime.

d. Iran's limited options to prevent more sanctions makes it more likely that it will undertake some type of attack on a third party tanker as a literal "fire across the bow." The U.S. and its allies should declare publicly ASAP that any so-called "mistaken" attack on a commercial vessel in the region by any of Iran's forces will accord license for the international community to take preemptive action to station security forces in the Straits to counter any further threats to commercial shipping in the region.

In this game of high stakes international chicken with Tehran, the better diplomacy is to turn the chairs and force the ayatollahs to blink first.