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Ronald Stoeferle

Ronald Stoeferle

Ronald is a metals analyst at Erste Group. Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4…

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Power Struggles at the Persian Gulf - is Another Gulf War Imminent?

Iran is currently the fifth-largest oil producer in the world, the second-largest producer in the OPEC, and the third-largest oil exporter worldwide. Of the total production of almost 3.5mn barrels/day, 2.285mn barrels/day were exported last year. 0.8mn barrels/day are shipped to the OECD countries in Europe, 0.6mn barrels/day of those to the EU and 200,000 barrels/day to Turkey (50% of the Turkish demand). But Asia is the most important export market at 1.5mn barrels/day, with China alone accounting for 550,000 barrels. Japan, India, and South Korea are also important trading partners.

Destinations of the Iranian oil exports  
Iranian Oil Exports
Source: EIA

On 31 December, US President Obama ratified a law that was intended to step up the pressure on Iran. In their strictest sense, the economic sanctions imposed against the Iranian central bank and the financial sector mean that international banks will be excluded from the dollar system if they maintain their business relations with the Iranian central bank. The measures are aimed against foreign private banks, state-controlled institutes and central banks.

Exchange rate US dollar / Iranian rial 
Exchange Rate US dollar/Iranian rial
Sources: Bloomberg, Erste Group Research

This has resulted in an immediate isolation of Iran from the dollar system. Due to the dollar shortage, the Iranian rial depreciated by 30% against the US dollar within a matter of days . Due to the strong dependence on imports in most sectors, inflation has begun to turn into hyperinflation. The sanctions have already had a drastic effect on everyday life. Since the imports of commodities cannot be paid anymore, grain imports (among others) are now paid in gold. Oil has also been offered as currency in barter transactions. The price of rice has doubled since the beginning of the sanctions and the price of corn has tripled. It is impossible to get foreign exchange on the black market. Iranian banks increased interest rates to 20% in order to slow down the bank run.

The government knows that the level of discontent due to the drastic price increase of food and energy is enormous and might escalate soon. Given that parliamentary elections are imminent (i.e. to be held in March) the opposition might now call for mass demonstrations. Therefore we do not expect the situation to relax in the near future.

Within a few weeks, the US have thus isolated Iran from the international banking sector, destroyed the currency, and induced hyperinflation. In terms of military strategy, the US seems to be following “McCollum’s memo”   – many details are a 1:1 copy of the oil embargo against Japan that was imposed on 25 July 1941, which pretty much meant a stab in the back to the Japanese, because of their extremely high dependence on oil imports. On 7 December 1941 Japan eventually attacked Pearl Harbor .

On 1 July, the EU also imposed a complete embargo on oil and oil products. Deliveries of equipment for the Iranian oil industry and investments in Iranian oil companies have also been disallowed. And for the first time, sanctions against the Iranian central bank have been imposed: its assets were frozen in the EU. We believe that eventually the sanctions will just turn into oil price subsidies for Asian buyers. China and India will be happy to fill in at significantly better terms for the European importers. We think that the consequences will not only harm Iran, but ultimately the entire world.

A look into history supports this view. The Yom Kippur War in 1973, the Iranian Revolution in 1978, the first Gulf War from 1980 onwards, and the first war at the Persian Gulf from August 1990 onwards all led to a decline in global oil production of 4-7%. As a consequence, the oil price increased by a minimum of 30% and a maximum of 70%. Each one of those wars was followed by a recession in the US.

Oil crises and average production outages 
Production Outages During Oil Crises
Sources: EIA, ML GCR, Hinde Capital

The sanctions will also expedite the downward trend of Iranian oil production. Numerous foreign project managers will leave the country and the access to capital, technology, and human resources will gradually dry up. According to National Iranian Oil Company, USD 30bn would have to be invested annually in order to achieve the production target of 5.15mn barrels/day until 2016. We believe this is unrealistic. Therefore we expect production to fall to slightly less than 3mn barrels/day by 2014. If domestic demand continued to develop as dynamically as in the recent past (which, however, is doubtful, due to the recent cuts in subsidies), oil exports would drop below 1mn barrels/day by 2015.


By. Ronald Stoeferle of Erste Group

Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%

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  • R DAVIDSON on March 17 2012 said:
    Good Analysis. Iran does not seem likely to bow to US wishes. It won't attack, until it has a nuclear weapon, Which Israel and the Saudis are unlikely to allow. So
  • Nexus789 on March 18 2012 said:
    Obama has just signed an Executive Order to enable the war time seizure of resources. Why would he sign that? It looks like the lunatics are going to start a global conflagration.


    Sec. 601. Secretary of Labor. (a) The Secretary of Labor, in coordination with the Secretary of Defense and the heads of other agencies, as deemed appropriate by the Secretary of Labor, shall:

    (2) upon request by the Director of Selective Service, and in coordination with the Secretary of Defense, assist the Director of Selective Service in development of policies regulating the induction and deferment of persons for duty in the armed services;
  • Philip Andrews on March 18 2012 said:
    The question really is does Iran have a back up plan for her oil exports?

    It doesn't take a genius to have figurede oiut all the possible options the US/West has for a 'sanctions war' against Iran. Iranians are famously skillful at long term strategic planning.

    It is highly probable that they would have worked out, esp. with their Asian trading partners who it seems are tiring of dollar dominance, alternative ways to pay for the oil. Russia, China and India are pretty much with them.

    As for the [population it depends on how far Iranians side with their government for both nationalist and religious reasons against the West. The (secular) West always assumes a kind of simplistic logic in these situations; sanctions will reduce the economy therefore the population will rise up to overthrow the 'unwanted' government and replace it with a liberal democracy in washington's own image. Etc. etc.

    A bit like with Syria; the West hopes that Assad will fall and a 'pro-Western regime' will take over... More likely a Jihadist MB regime...

    The West is simply blind to the kind of mess its creating for itself with Iran and the reast of the ME by ignoring or misunderstanding the religious dimension. And how Iran could strategically work out ways to counter Wester efforts.

    Those efforts are by no means unanmimously supported. So while many countries may pay lip service to sanctions there may be many back channels operating or being created to circumvent this sanctions regime, back channels that may later develop into alternative ways to handle the Iranian-Asian energy system that avoids the dollat system altogether.

    If this is the case it may simpky hasten the dollars demise as the predominat international currency. The West may be in effect cutting its nose to spite its face.

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