Saturday, September 26, 2009

Iran, Oil and Energy Security

If you've been watching the news you know that tensions between Iran and the U.S. are very high. We should consider the possible economic repercussions ...

The first thought that comes to mind is, of course, about oil. Oil prices did rise in New York on Friday as news about Iran's nuclear program went public. However, one analyst noted that while in previous economic periods this type of news could have resulted in a $10 run-up in the price of oil, the recession has significantly weakened the global demand for oil and the oil industry has quite a bit of spare capacity so the effect wasn't that severe. [1] Iran produces less than 3% of the oil consumed daily in the world, so spare capacity could pick up any slack should Iran's oil industry stop exporting for whatever reason. [2]

However, Iran lies on the Strait of Hormuz, through which 20% of global oil exports pass. Remember, the Arabian peninsula (Saudi Arabia, Oman, Yemen) are right across the Persian Gulf from Iran. The real threat to the global economy is if these current tensions transform into a military conflict. At that point, its hard to predict what would happen to the price of oil (other than that it would go up, obviously).

Interestingly, a few days ago the New York Times published an article which stated that China has joined India and a few other countries in selling gasoline to Iran (despite being a net oil exporter, Iran lacks the refining capacity to meet its domestic demand for gasoline). The state-run Chinese firm that is selling oil to Iran also happens to be doing its trade in Euros, answering Tehran's call to move away from use of the U.S. Dollar. These imports would soften the blow that any potential U.S. trade sanctions would exert on the Iranian economy. Ironically, Western sanctions on Iran could turn into a business opportunity for Chinese and Indian companies. [3]

Elsewhere on the globe, the Wall Street Journal warns that Nigeria could pose a bigger energy-related problem for the global economy than Iran does. Nigeria used to produce 13% of the world's sweet crude oil in 2005. However, political instability has reduced output since then. [2]


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