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Iran, Oil Prices and Gambling with the World Economy

By Daniel J. Graeber | Mon, 02 April 2012 22:10 | 2

The White House last week acknowledged problems in the global oil market but said the situation was secure enough to move ahead with tighter sanctions against Iran. President Obama said he was confident about the current state of the global economy and had assurances there was enough spare capacity to buffer against a severe shock to energy markets. The measure is meant to ensure Tehran doesn't have the finances to back what's seen as a nuclear weapons program. It might be something of a political and economic gamble, however.

Obama had until Friday to decide on pushing ahead with sanctions that would bar financial institutions from the U.S. economy if they don't substantially cut their oil transactions with Iran. Some countries have already decided to back away from Iranian crude and others received some concessions from Washington for at least cutting back.

Concerns over Iran helped push oil prices up, however. The International Energy Agency said from Paris last week that oil prices are "very high again." IEA Executive Director Maria van der Hoeven said the agency was keeping a close eye on oil markets, noting concern because of lingering fragility in the global economy. And she's right to be concerned because last week, the Organization for Economic Cooperation and Development warned the British economy was at risk of sinking back into recession.

Nevertheless, U.S. Secretary of State Hillary Clinton sounded upbeat during weekend talks in Istanbul, noting Turkey's move away from Iranian crude was a sign that pressure on Tehran was finally isolating the Islamic republic. Against that backdrop, however, was a report in Turkish media noting natural gas prices in the country were on the rise. The same report said that those earning the minimum wage in Turkey would spend a good chunk of their income on natural gas now because of the increase. In the United States, meanwhile, motor club AAA reported the average price for a gallon of regular unleaded gasoline reached $3.92, about 10 percent higher than prices during the same time last year.

Obama, in a presidential memo, said he had carefully considered the state of the economy and of global energy markets before his decision. Oil prices spiked by about 70 cents after he made his announcement, but quieted in part because of mention of the existence of strategic reserves.

This is a presidential year in the United States, which means most claims made by U.S. political leaders should be weighed in that context. Obama is likely to ride on victories like Osama bin Laden's assassination last year but will face challenges given the state of the economy. The White House, in its assessment, recognized that there were shortages in the global oil market because of tensions in Sudan, Yemen and Nigeria, among others. The president hasn't formally committed to releasing strategic petroleum reserves, however.

Either Obama's statements are reflection of his faith in the ability of global markets to handle an oil shock or it’s a statement coordinated with his political ambitions in November. But if the mere mention of a release of strategic petroleum reserves is enough to prevent a major price spike, perhaps there's some credence to claims that some part of the price for crude oil is based on guesswork. That being said, the IEA warned that oil prices in 2012 have the capacity to push the global economy back into recession. Given lingering fears over Iran and the subsequent effects on world markets, the geopolitical chess match with Tehran is becoming something much more than deterrence of nuclear weapons when the entire global economy is at stake.

By. Daniel J. Graeber of Oilprice.com

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  • Earl Richards on April 03 2012 said:
    Iran will not close the Straits of Hormuz, because the closing would block Iran's export trade, including oil shipments to China, Japan and India. Iran is not going to strangle itself. Iran's oil price has nothing to do with the US oil price, because Iranian oil is not exported to the US and because Iran and the US do not have diplomatic relations. Iranian oil is traded on the Iran Oil Bourse and on the Singapore spot market and has nothing to do with the oil markets of western Europe and North America. The closing of the Straits is being used as a phony excuse by Big Oil, Wall Street and their media pundits to increase the price of oil.
  • Frobn on April 04 2012 said:
    Bush got it wrong on Iraq and Obama will get it wrong on Iran. When gambling is based on so many things needing to go right the law of averages predicts failure.

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