The first Category 5 storm of the season is here – but it’s a different kind of storm. This is one politically motivated and with an outcome that is potentially more damaging than any hurricane. And the ‘eye wall’ of this geopolitical fury looks like it may be tracking a direct hit on the world’s already-vulnerable oil supplies. We can even predict the likely date: anytime after April 28th, 2006. That’s the deadline that the UN Security Council has given Iran to stop enriching uranium.
Though the issues surrounding Iran’s atomic program relate primarily to national security, the situation that is percolating can’t be separated from the oil markets. Iran has a couple of very big oil trump cards and it knows how to brazenly flash them around.
For one thing Iran produces 4.0 million barrels per day, representing close to five percent of the world’s supply. It’s a significant contribution considering that the margin between global oil capacity and demand is a very thin three percent.
In addition, Iran controls half of the Strait of Hormuz, the narrow 30-mile-wide waterway through which close to 17 million barrels of Middle Eastern oil passes every day; an artery that supplies almost 20 percent of the world’s 1,000-barrel-per-second oil addiction. Indeed, the Strait of Hormuz is recognized as the biggest ‘chokepoint’ of oil supply in the world. Any military action threatening Iran de facto threatens this Strait and all that passes through it.
In addition, countries on the other side of the Persian Gulf from Iran – for example Qatar, the UAE and Kuwait – are generally considered by Iran to be complicit with the West, and whose oilfields are therefore potential targets for Iranian missiles should this geopolitical ‘storm’ really hit hard.
Here is a sample of potential outcomes, in order of severity, following the April 28, 2006, UN deadline.
1) Compliance by Iran – Diplomacy is successful; Iran complies with UN demands; all else being equal, oil prices are likely fall back to the $60.00 per barrel range; domestic gasoline retail prices potentially ease by 30 cents.
2) Stalling by Iran – Iran offers carrot of negotiation; diplomacy drags on with hopes of compromise; oil and gas prices may sag somewhat, but remain volatile.
3) Non-compliance by Iran #1 – Economic sanctions are imposed against Iran by the UN; diplomatic efforts on the nuclear issue drag on indefinitely; oil prices remain at current levels; no easing of gasoline prices anytime soon.
4) Non-compliance by Iran #2 – Iran stays indifferent to sanctions and proceeds with its atomic program; proceed to outcome (7)?
5) Non-compliance by Iran #3 – Sanctions imposed; Iran retaliates by restricting oil output; oil prices spike up; gasoline prices rise to mid-$3.00/gallon range or higher; proceed to outcome (7)?
6) Non-compliance by Iran #4 – Sanctions imposed; Iran retaliates militarily against other Gulf States; proceed to outcome (7).
7) The United States and/or Israel attack Iran’s nuclear facilities regardless of UN compliance or sanctions – Iran retaliates militarily; oil and gasoline prices spike up hard (how high depends on level of damage to oil supply lines); strategic petroleum reserves (SPR) are released similar to last year after the hurricane, but rebalancing the world’s normal supply and demand balance will remain challenging in the aftermath.
Of course, there are many variations on the themes above. In particular, it’s possible that any potential attack on Iran will elicit a minimal military response thus defusing the whole situation. After all, despite all of Saddam Hussein’s sabre rattling and bravado in the lead up to the March 2003 invasion, nothing happened. No oil fields were blown up and no missiles were fired at neighbouring oil producers in the region.
But Iran is not Iraq. Notably, Iran’s oil output is over twice that of Iraq, and as mentioned Iran is in a very strategic geographic location. As well, Iran’s bombastic leadership appears far more determined to pick a fight and play the trump cards it knows it has in its hand. Finally, Iran has a potentially oil-hungry friend in China; a relationship that makes Iran’s trump cards against the west stronger.
So, there is a major geopolitical storm brewing around oil. The winds are already up (as evidenced by rising prices) and addicted consumers of oil and petroleum products like gasoline are going to have to weather it. And if the Iranian situation isn’t threatening enough, there are storm clouds hanging over other major oil producers like Nigeria and Venezuela too. In an era where supply and demand for oil is tight, every oil producer feels it has trump cards.
From a consumer’s perspective filling up at the local gas station, it’s difficult to understand and relate to global politics in far-away lands. Distant hurricanes and typhoons often don’t get much domestic media. So, perhaps the storm metaphor is not personal enough. How about visualizing the world’s oil supply lines as arteries; a complex flow of pipelines and tankers pumping oil into the vital organs of our society, in particular our cars and trucks. Using this artery metaphor, the world’s oil supply lines are ripe for a heart attack.
About the Author:
Peter Tertzakian is Chief Energy Economist and Director of ARC Financial Corporation, one of the world’s leading energy investment firms.
His website is www.1000barrels.com/.
A Thousand Barrels a Second
(The Coming Oil Break Point and the Challenges Facing An Energy Dependent World)
Author: Peter Tertzakian
ISBN 0-07-146874-9
Hardcover, 288 Pages, $27.95
Photographs, Charts, Graphs, and Maps
