1 post tagged “energy”
Two articles about Iran:
- From the Economist.
- From the Lowy Institute.
Indicators from inside Iran:
- Ayatollah Ali Khamenei likes remind the US that should they make a “mistake” with regard to Iran, “energy flow through this region will be seriously in danger.”
- President Mahmoud Ahmedinejad has become a rockstar in the Muslim world by standing up to the US and has somewhat isolated the pragmatists and Bazaaris in the Iranian regime.
- The Iranian military have conducted exercises in the Strait of Hormuz which is the passage through which most oil is transported from the region.
It’s a crazy world we’re livin’ in:
- International Atomic Energy Agency demands that Iran suspend its uranium enrichment activities.
- Chapter VII resolutions are being debated in the Security Council.
- Russia and China are resisting the invocation of Chapter VII.
- The EU is continuing to provide incentives for compliance.
- The US will probably push for sanctions.
- Should sanctions fail, air strikes and military options are more likely.
What would the effect be?
- Iran is the 4th largest producer of oil in the world (3% of the world’s oil).
- About ¼ of the world’s oil flows through the region.
- Other oil producing areas are not poised to pick up the slack – only Saudi Arabia has significant reserves and most of them are in heavy sour crude while global demand is mostly for sweet light crude.
- A World Bank simulation estimated that a sustained loss of 2million bpd would see a 1.5% decrease in global GDP.
Demand and Supply
- We’ve already had a prolonged oil ‘shock’ – it was $10/barrel in 99 and is now over $70/barrel and we’re still seeing global growth – so what’s the problem?
- The increase in price has primarily been driven by increased demand from growing economies like China and India.
- According to the Lowy Institute article, supply shortage is a different and much more damaging story.
- While this is not very well explained in the article, I imagine that it is because increases in price due to demand came bundled with increased demand for products and services from the US and around the world (eg steel from Australia).
- Increases in price due to supply shortages won't have any of these ancillary benefits.
Would Iran do it?
- There is evidence that Iran is conflicted about using oil as a tool for foreign policy.
- Lobbing in the occasional rhetorical grenade helps keep the price of oil high.
- Oil earnings account for 80% of Iran’s total exports and 40% of the government budget.
- Iran has an ‘Oil Stabilisation Fund’ that has been built up to 20billion.
- However disrupting the oil flow would be a last resort as it would weaken the grip of the regime over the populace.
