A decision by the European Union to ban imports of Iranian oil dramatically raised the temperature of the rhetoric about Iran's nuclear program, threatening to destabilize the region even further than two U.S-led wars and a series of recent uprising already have.

In a statement today, the EU announced that it will cut off all trade in petrochemicals and minerals with Iran, the holder of 10 percent of the world's crude oil reserves, effective July 22. The Council of the European Union cited "their serious and deepening concerns over the Iranian nuclear program." Until recently, Iran relied heavily on Europe as its main customer - in 2006, fully 30 percent of the nation's exports went to the EU, closely followed by Japan at 26 percent. In recent years, however, China has consumed a larger and larger share of Iranian production. Deutsche Bank recently estimated that the Asian giant now buys a fifth of all Iranian production, or about 555,000 barrels per day. However, the Wall Street Journal reports  a recent pricing dispute will cut exports by nearly half this month, putting even more pressure on the beleaguered country.

Iran slammed the new EU sanctions as "psychological warfare" - though the better term might be economic warfare - and asserted that it has the right to unilaterally close the Straits of Hormuz, the narrow of body between Iran and Oman through which fully 20 percent of the world's crude oil flows every year. The best practical comparison might be Indonesia threatening to close the Singapore Strait or Spain shuttering the Straits of Gibraltar.

Unsurprisingly, the U.S. responded with hawkish language and a show of force, dispatching a carrier battle group led by the USS Abraham Lincoln right through the Strait, an act which passed without Iranian retaliation. A few weeks ago the Iranian government warned, as the carrier USS John C. Stennis departed the Gulf and set sail for the Pacific, that it would attack if the warship returned. The Strait of Hormuz is not in international waters, though the main shipping lanes are in Omani territory. Any Iranian raid on the U.S. battle group will surely result in an overwhelming military response. 

Effectively, it seems the U.S. called Iran's bluff on closing the Gulf. Staggering differences in military power and materiel remain - small, fast attack craft comprise almost the entirety of the Iranian Navy , along with a handful of light frigates. Though this force is vastly outgunned and outclassed by the U.S. carrier group, some military exercises and simulations have shown that a large force of missile-armed small boats, operating at high speed and with little regard for the crew's safety or survival, could devastate the numerically smaller U.S. forces. In addition, according to the Tehran Times , the Iranian Navy will conduct war games in the region within the next month.

The market impact remains unclear. Brent crude oil futures for March 2012 delivery rose 1 percent to $111.7 per barrel. U.S. oil companies traded largely flat today - ExxonMobil ( XOM ) and Chevron ( CVX ) were basically unchanged, while BP ( BP ) rose about 1 percent by noon. All of these companies' share prices are influenced by a constellation of factors, though any military action in the Strait of Hormuz would definitely impact their production in the Gulf. 

One major change came from Brazil, where Petrobras ( PBR ) shares shot up 5.5 percent by midday, contributing to a rise of more than 10 percent in the last week. The Brazilian oil major would probably benefit  from increased tension in the Middle East , since it holds no fields in the Persian Gulf and sells its petroleum and natural gas around the world. Still, it's best to be wary of tying every stock movement to political news - the gain might also have come from the announcement that Brazilian finance minister Guido Mantega will appoint Maria das Gracas Foster, the state-run company's natural gas and energy chief, as a new chief executive officer once Jose Sergio Gabrielli departs. Maria Foster is a long-time executive/public servant at Petrobras with close ties to President Dilma Rousseff, Bloomberg reports.

Back in the Middle East, Iran will doubtless continue to pursue nuclear power , the assassination of its top scientists notwithstanding. Its inability to stop the U.S. from sailing through Hormuz will demonstrate to its leaders the need to find a trump card in negotiations, while the EU sanctions will put more pressure on an already weak economy and increase domestic unrest. As the Iraq sanctions of the '90s proved, economic stress will tend to increase, rather than decrease, the repressive tendencies of autocratic states. Iran likely learned this game from North Korea, where nuclear weapons represent perhaps the only bargaining chip the Kim regime has against the West, aside from on-again off-again Chinese backing.

Paradoxically, the presence of the U.S. carrier battle group may give Iran a greater incentive to push its nuclear program towards military aims. For the global economy, all-out conflict in the Persian Gulf would create massive oil shortages and terrible deprivation. A hedge against that could be found in domestic oil and gas producers based in the U.S., Canada and South America . Though another U.S. war in the Middle East would be a disaster, cautious investors might want to keep in mind the words of Roman writer Vegetius - "If you want peace, prepare for war."