To understand what is going on in Iran, one needs to understand the psyche of Iran's leaders.
A year ago, Iran was riding high - it was working hard at becoming the de facto leader of the Muslim world, and it seemed quite close to becoming a superpower, taking aim squarely at the United States.
Since then, relations have cooled significantly between Iran and most Arab countries, internal criticism has increased, Ahmadinejad's list lost in an election and US pressure has had an effect on the shrinking Iranian economy. Clearly, the leaders have lost momentum, although they are still quite dangerous.
Islam is wedded to the notion of honor. This deceleration of Iranian influence was a challenge to Iran's Muslim sense of pride. And in today's Islamic world, the opposite of honor is not disgrace - it is irrelevance.
Iran simply had to show that it can affect world politics the way it did a year ago.
There is little doubt that this abduction was planned and staged. Great Britain has already proven that the ship was in Iraqi territorial waters. Either Iran also claims the same waters as its own, or Iran is lying.
But notice what Iran is demanding now - just Britain's admission of making a mistake. Notice what the video of the female prisoner was focused on - her admission that it was a mistake.
Iran is trying desperately to make itself look like the wronged party, but more than that - it wants to humiliate Great Britain. Because in the Iranian psyche, honor is a zero-sum game, and if England is humbled, Iran is glorified.
Iran assures the world that all England has to do is say a couple of words and then the great Islamic Republic will magnanimously release the prisoners. To the West, saying a statement like that is not a big deal, although the West certainly has pride as well. Iran was calculating that Great Britain's Western values putting human life above all else will force it to submissively take the blame for this snafu. This will then make Iran's stock zoom in the estimation of the other Islamic nations that share the same values and help restore Iranian honor and leadership.
What Iran did not seem to realize is that Western nations are almost as averse to dishonesty as Muslim nations are to dishonor. England is simply not going to say "oops" when it is in the right.
England should make it very clear to Iran that it has miscalculated, badly.