The brinkmanship with Iran in the Strait of Hormuz

The world became a much more jittery place this week as the U.S. and Iran launched their respective warships and rattled their rocket-laden sabres at each other in the strategic Strait of Hormuz, literally the Iranian coast.

Heck, even the head of the U.S. navy admitted on Tuesday that he's losing sleep thinking of how to respond to Iran's threat to blockade global shippingalong the Persian Gulf's narrow strait, through which about 20 per cent of the world's oil travels each year.

Even if U.S. naval and air forces were to quickly curtail an Iranian blockade, the very act would likely spark another global economic panic. Analysts predict oil would soar an additional $50 a barrel, causing panic inflation and currency wobbles around the world.

Every day seems to bring a new flashpoint. On Wednesday, another senior Iranian scientist connected to its uranium enrichment program was assassinated in a bomb attack that Tehran immediately blamed on Israel and the U.S.

The killing follows the pattern of the mysterious covert warI wrote about last monththat is being waged inside Iran against its nuclear program.

The campaign has already killed or wounded three other scientists there and earlier in the week. In a separate action, the Iranians sentenced a former U.S. marine to death as a spy. He had been visiting family in Iran.

Sanctions

These current tensions stem directly from the severe new economic sanctions that the U.S. and other Western countries are trying to apply to Iran to get it to come clean on its nuclear program.

On New Year's Eve, President Barack Obama signed legislation that would penalize foreign companies that deal with Iran's central bank, the main clearing house for its central commodity, oil.

Many European countries have also agreed in principle to an embargo against Iranian oil, and the U.S. is trying to lobby Asian nations, China in particular, to follow suit.

Why is this so significant? After all there have been sanctions of one kind or another against Iran ever since its radicals seized the U.S. Embassy there in 1979. These have included UN-approved sanctions aimed at blocking Iran from acquiring nuclear weapons technology.

But while past sanctions have hurt Iran's economy by denying it technology and outside investment, this new round would cut off the very oil revenue that supports much of the government and its operations.

In short, it would cause chaos in an already battered economy.

Panic hoarding

Within Iran, the public fear of new sanctions has already sparked runs on its banks and caused panic hoarding of market goods.

Inflation has driven prices up 30 per cent,reports say, and there is even fear of national bankruptcy as the Iranian currency falls into a tailspin.

To the Iranian government this amounts to outright economic war.

It is convinced the sanctions are designed not just to block its uranium enrichment program but to weaken the government so that it might be toppled in parliamentary elections in March.

In the West, meanwhile, those supporting these tougher sanctions believe it is the only peaceful way to force Iran to give up its nuclear arms ambitions.

It isalso argued that the sanctions help deter Israel from attacking suspected Iranian weapons sites and thus dragging the U.S. and the whole region into a wider war.

Second thoughts

But Iranian threats, particularly those involving the Strait of Hormuz, are having some effect.

In the past few days several European countries, terrified of adding a world oil crisis on top of the current euro problems, have indicated they will rethink the sanctions before they are to decide on them on Jan. 23.

Washington is also having trouble persuading China, Japan and South Korea to cut back on their purchases of Iranian oil.

In the U.S., many believe the Obama administration took these tougher measures in part to counter Republican charges that Washington was not doing enoughto thwart Iran's nuclear ambitions.

But now many observers feel that the sanctions themselves have reached the point where they risk provoking an unstable Iranian regime into desperate acts of retaliation.

Iran has hinted at times that it may be willing to negotiate over its nuclear plans, but it's widely believed that the regime fears that would leave it looking toothless and militarily vulnerable, as Libya was after it gave up its nukes.

From Tehran's perspective, better perhaps to be pre-emptively aggressive to try to scare the world off sanctions once and for all.

A 'wounded Iran'

But the new Obama legislation is not likely to go away and it will ensure that international trade with Iran is only going to get tougher.

Already, many countries are looking for new oil suppliers to bypass Iranian ports, and they are building up strategic reserves in case of disruption.

Apart from the fear that Iran may close down the Gulf, even if only temporarily, the continued threats may drive shipping insurance to record levels.

The price paid by Tehran for this would be enormous, of course. So it may all be a bluff. But this is the way some states slide, by miscalculation, into war.

"I fear we may be blundering toward a crisis nobody wants," Helima Croft, senior geopolitical strategist at Barclays Capital warned recently. "There is a peril of engaging in brinkmanship from all sides."

The warning is echoed by Vali Nasr, a former Obama administration adviser and a leading Mideast scholar, who feels the danger of a wounded Iran is currently being underestimated in Washington.

"The Obama administration talks of sanctions as an alternative to war, but we're in a situation where economic sanctions are putting us at greater risk of war," he said in a recent PBS interview.

It's always an ominous sign when there seems there is no clear way for diehard enemies to back down from their rigid stands. Add in the internal politicsinfighting within the Iranian government, and intense ideological divisions in the U.S. presidential campaign, both in an election yearand that puts extraordinary pressures on their respective leaders to look tough.

Therest of us can only hope that they know where the limits are.