updated 9/30/2009 3:43:10 PM ET 2009-09-30T19:43:10

Renewed tensions between Iran and the West are doing little to push oil prices higher, a stark shift from previous years that could strengthen efforts to impose tougher sanctions on Tehran.

Threats of new trade bans or a military strike against the Islamic republic over its nuclear program helped drive crude prices to a record near $150 a barrel last summer, as traders grew concerned that Tehran could disrupt crude shipments out of the Persian Gulf.

The economic downturn has changed that dynamic.

Oil is now trading at less than half last summer's peak, reflecting a steep drop in global demand and a good amount of spare supply.

That, some analysts say, gives Iran less leverage than it had when supplies were tight and prices were high.

"Today, the world powers have more options on Iran than they used to," said Olivier Jakob of Petromatrix in Switzerland. "There is lot of spare capacity in OPEC, and demand in the West is much lower."

OPEC has slashed 4.2 million barrels off its daily output since last September. Iran, the bloc's second biggest producer, exported about 2.4 million barrels daily in 2008.

Saudi Arabia, OPEC's top producer and a strong U.S. ally, could cover all of Iran's exports if it wanted. The kingdom recently boosted its production capacity to 12 million barrels a day — about 50 percent more than it's currently producing.

A Kuwaiti oil official, in comments published Wednesday, underscored other producers' willingness to make up for any Iranian shortfall should the need arise.

Mohammed al-Shatti, a member of Kuwait's delegation to OPEC, said in a report in Wednesday's Alrai newspaper that while sanctions could affect the oil market, "the existence of more than 5 million barrels of daily OPEC spare capacity would lessen the negative effects on prices in case of any stoppage of oil supplies from Iran."

Al-Shatti's remarks came a day before the U.S. and five other nations were due to hold talks in Geneva with Iran over its nuclear program, which Tehran insists is peaceful and aimed solely at producing nuclear energy. The U.S. and its allies suspect Iran is pursuing nuclear weapons.

Washington hopes the talks will lead to further discussions and openness about Iran's nuclear program.

But U.S. officials are also working with allies to prepare proposals for tougher sanctions targeting Iran's energy, financial and telecommunications sectors if it does not comply.

An embargo on Iranian crude oil shipments is unlikely for the time being but could be economically feasible, Jakob said, because prices and demand are relatively low.

Short of an embargo, the slack in the oil market would also allow the international community to impose more limited sanctions on Iran's oil industry — a far less sensitive subject now than when prices were trading above $100 a barrel.

"The world can afford to have crude oil sanctions on Iran. That was not an option two years ago, or a year ago," Jakob said.

The U.S. and Israel have refused to take airstrikes off the table as an option to deal with Iran's nuclear program, leading Tehran to warn that it would respond to any strike by shutting the Strait of Hormuz, a chokepoint at the mouth of the Persian Gulf through which about 40 percent of the world's tanker traffic passes.

Jakob said sanctions targeting Iran's oil industry would be preferable to a military strike because they would not give Iran an excuse to halt oil shipments out of the Persian Gulf.

Closing the strait with mines, a blockade or other deterrents would cripple Iran's own ability to export oil, but it would also prevent major Arab producers such as Saudi Arabia, Iraq, Kuwait and the United Arab Emirates from shipping most of their crude.

Analysts acknowledge that a military escalation in the Gulf could quickly send prices shooting higher.

But the muted reaction in prices so far signals energy traders see little immediate threat of a strike.

Commodities analysts at Barclays Capital said in their weekly oil report Wednesday that current pressure from the U.S. and its European allies is reducing the threat of military action for now, even if Iran has little interest in backing down.

"We've seen this movie before," said independent analyst and trader Stephen Schork. "The fact that prices aren't getting any lift on this tells you the oil markets are skeptical."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Discuss:

Discussion comments

,

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 1.97%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.70%
13.70%
Cash Back Cards 17.91%
17.91%
Rewards Cards 17.17%
17.17%
Source: Bankrate.com