The oil market and the Iran crisis

Posted in Iran | 26-May-06 | Author: Ioannis Michaletos

Ioannis Michaletos is WSN Editor South East Europe.

Nowadays one of the foremost concerns for the Western world is the upward trend on oil prices that has accelerated with the looming crisis for Iran’s nuclear program. Even though at this stage, there is not any interstate war in process, the oil prices are in the same level (In real price terms), that were in 1980-81 a year after the Sach’s overthrow in Iran and the beginning of the 8 year war between Iran and Iraq.

The main question therefore is why oil prices have triples between the period 05/2003 and 04/2006i and reached almost 75 $ per barrel. There are mainly two reasons that explain the aforementioned. First of all the all- expanding Chinese as well as Indian economy, constantly increase consumption and will continue to do so for the foreseeable future. Secondly the situation in Iraq is still in a critical point and all scenarios are in flux. The American administration even though it has plenty of options, seems not confident enough in pursuing towards the second stage of creating a stable future for the Middle East. This in no case could be achieved without altering the present day “Political architecture” in the region and creating a new era away from the colonial borders and states imposed by the British and French governments as early as in the mid 20’s. The whole situation therefore is bread and butter for everyone associated in oil price speculation, and such is the case of the Hedge Funds that are betting on all world markets towards the upward direction of oil prices.

Back to the Iranian crisis, the previous reasons that explained the current price inflation, will most certainly add to the market’s nervousness. Iran produces 3,9 million barrels of crude oil per day whilst the available overproduction globally is only 1,5 million barrels per dayii. That basically means that in a case of a war in Iran there is going to be a shortage of some 2,5 million barrels per day that no other producer for the time being can fulfill. At this point it is interesting to not this is an unprecedented implication in world’s history.

In every case there was historically an oil crisis, the “Hegemonic power” of the international hydrocarbon system –USA up to 1967 & Saudi Arabia up to date- had the capability of balancing the world market. In the cases like the oil embargo in 1973 the situation had been in deadlocks only because of short- term geopolitical advancements made by the Arab countries, but in any case the production and supply capability were intact. The real difference with the past is that nowadays if USA attacks Iran even if Saudi Arabia supply the market with the extra 1,5 million barrels it can overproduceiii, it will still leave the world with a deficit of 2,5 barrels per day. That is a scenario capable of skyrocketing the current prices up to 90 $ per barrel in a matter of days. More worrying are the findings of OECDiv, that the strategic reserves of its members have oil for only 51 days with the current consumption rates. Moreover we have to add to the already complicated situation that the Iranian government will have, as it is presumed, the strategic aim of blocking the Hormouz straights thus further disrupting the world oil trade and pushing oil prices well ahead the 100 $ mark.

The USA choices in case of a military strike are more or less crystal clear: A definite short-term victory in a matter of a few weeks, even though this remains to be seen if it is possible under the current circumstances. Any other development will severely damage the world economy, especially the European markets and will further boost the all- expanding Russian economy. In any case the Iranian crisis is completely different than the Iraq one in 2003 and the use of military threat is not the only tool capable of solving the issue. Europe as well as Russia could play an integral part in easing the negative complications of the crisis and play a significant supportive role that will prevent the world economy from experiencing a crisis. A “New Yalta” regarding Middle Eastern and Central Asian affairs should become viable within the forthcoming period, so as to bring stability to an area capable of endangering the world’s prosperity and security for generations to come.

© Ioannis Michaletos, 2006

i U.S Department of energy/OPEC Basket prices, 11th of April 2006
ii Energy Information Agency/Short Term Energy Outlook/April 2006
iv OECD energy report/14/3/2006, Page 25-28