War on Iran and its consequences

Oil, the blood of global economy, is the biggest derivative of economic growth in all the economies across the world. The importance of oil to the world’s super-economy can be testified by the statements from all US Heads of state. Every president since Richard Nixon has asserted that we are running out of oil.

Iran embargo effects
Crude oil prices that nose dived to the rock bottom level of $18 per barrel during mid 90s are currently rocketing at $111 with upward tendencies. It is unfortunate that the recent push is not caused by a natural demand-supply phenomenon but is being triggered by political decisions.
Oil prices rose this week with Brent crude futures up near $111, extending gains from last week as rising tensions between Iran and the West increased the risk of disruption to crude shipments by the world’s fifth-largest oil exporter. But the intensity of the bad news does not end here. More is yet to come. Iran warned the West that any move to block its oil exports would more than double crude prices with devastating consequences for a fragile global economy. Christopher Bellew, an oil trader with Jefferies Bache in London, said that worries about Iran and Syria were helping to buoy oil prices. “If Iranian exports were suspended that would be very significant as the market is tight already,” he said. The fresh oil price threat has emerged from the European Union’s consideration to put an oil embargo on Iranian import which is already in place in the United States. “Oil traders are pricing in a 20 per cent chance of a military conflict with Iran, which could push prices above $200, so they’re buying insurance now,” said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.

Iranian stake
Iran is the third-largest exporter of oil, after Saudi Arabia and Russia. Having a daily production of 3.5 million barrels per day, its biggest customers — China, the European Union, India, Japan, and South Korea — together account for two-thirds of total Iranian oil exports, according to an published by the Energy Information Administration in the United States. Reduced orders from just one of those customers could be disruptive for Iran, where the economy is already suffering from the accumulated effects of other sanctions. In the face of looming embargo threat there is no nervous excitement in Iranian camp. Iranian oil minister Rostam Qasemi who attended the opening of the World Petroleum Congress in Doha said Iran was not worried about a potential embargo on Iranian oil by the European Union. Iranian reaction is tantamount to a feeling that the sky is not falling. “As soon as such an issue is raised seriously the oil price would soar to above $250 a barrel,” Foreign Ministry spokesman Ramin Mehmanparast said in a newspaper interview. The comments come as Iran strives to contain international reaction to the storming of the British embassy last week, a move which drew immediate condemnation from around the world and may galvanise support for tougher action against Tehran.
But the real story is that storming of British Embassy in Tehran was just used as a pretext to ‘strike when the iron is hot’. Washington and EU countries were already discussing measures to restrict oil exports after the United Nations nuclear watchdog issued a report in November with what it said was evidence that Tehran had worked on designing an atom bomb.

Fears of backlash
As the European Union is becoming skeptical about slapping sanctions on imports of Iranian oil, diplomats and traders say that the embargo could damage its own economy without doing much to undercut to Iran’s oil revenues. Iran on the other hand may find the alternate partners to sell its EU-specific oil at a cheaper price. It will open new ways of oil smuggling in the region. Sanctions critics say the regime of Iraqi former dictator Saddam Hussein was able to withstand sanctions for years. Oil accounts for 50 per cent of Iranian budget revenues, and those arguing for sanctions say they can deprive Tehran of billions of dollars and derail what the West sees as Iran’s attempts to build a nuclear bomb. But diplomats and oil industry insiders say Europe may calculate that even a small rise in oil prices as a result of an introduction of an EU-wide embargo would more than compensate Tehran for any losses from being obliged to re-route displaced supplies to Asia at discounted prices. “Maybe the aim of sanctions is to help Italy, Spain and Greece to collapse and make the EU a smaller club,” one trader joked. The remark reflects the growing unease that EU sanctions would hit hardest some of the continent’s weakest economies, because Iranian oil provides the highest share of their needs, not to mention the rest of the bloc. “The likely increase in oil prices that would result from a ban would be felt by all (European) oil refiners, not just those that are big customers for Iranian oil,” ratings agency Fitch said last week.

Political motivation
The threat to Iran’s oil exports and fears about a possible military strike on its nuclear facilities have helped keep oil prices above $100 a barrel despite sluggish global growth and a gradual return of Libyan oil supplies. Iran, the world’s fifth-largest oil exporter, has said it cannot rule out a self-imposed oil embargo to punish the West and on Sunday warned that oil prices could spike to $250 a barrel as a result of sanctions.

Embargo’s possible reaction
Supporters of sanctions say an EU ban would not amount to a supply disruption. Iranian oil displaced from Europe would flow to China, displacing existing sources of Chinese oil towards Europe. They say Beijing, as Iran’s buyer of last resort, would then have the leverage to drive a hard bargain on prices. However, calculations by US research firms and traders show the discount could be as small as a couple of percentage points. Saudi Arabia, the only oil nation with spare capacity, faces a tough choice. Shipping more oil to Europe to replace lost Iranian barrels could mean ceding promising Asian markets to Iran, its political foe. The Saudis have already started assessing the volume of Iranian supplies that go to their own big buyers.

Contingency plan
“It is sort of a contingency plan to know to what extent they can fill the gap and minimise the impact on the market,” the source familiar with the Saudi strategy said. “The Saudis want to know their options, if something happens.” A source close to the Saudi oil industry in Europe also said Riyadh would consider raising supplies if Iranian oil was lost. Saudi Arabia has already helped to substitute Iranian supplies once this year, when Tehran threatened to halt oil to India due to a payment dispute which followed US pressure on New Delhi to reduce dealings with Iran. This week, refiners in India, South Korea and Japan indicated they are reluctant to buy more Iranian crude, fearing that payments troubles could resurface again. “To make sanctions effective, the Europeans would have to go to the Chinese to ask them not to take more oil,” said a senior oil executive, who added that he did not expect sanctions to take place at least until the second quarter of 2012, when seasonal demand eases.

Pakistan Chapter
Pakistan, being a developing country will be the first causality in the oil war between Iran and the rest of the world. We have an annual demand of 2 million tonnes of oil mainly coming from Saudi Arabia. A rise in international oil prices will undoubtedly affect the pace of progress in the energy starved economy of Pakistan. It is critical to note that our demand for oil has slightly decreased in recent years due to slow growth in the industrial sector which is an unhealthy sign of our declining economy. A country with a growth rate of 2 per cent is already struggling hard to overcome its increasing financial woes especially the foreign debt mounting at more than $60 billion. It is predicted that the petrol and diesel smuggling from Iran will be an obvious outcome of the oil embargo on Iran. However, Pakistan can use its diplomatic sources just like China and India who are not supporting the embargo and are looking forward to continue their oil relations with Iran.
It is warned that the average household already spends more on transport than on cost of food and clothing, and will be hit hard if the oil spike filters through to pump prices. While the relentless rise in fuel prices is punishing us all, the poor are being particularly hard hit.