No one believes Iran’s assertions that its uranium enrichment program is purely for commercial power generation purposes, and yet opinions are divided on how to handle what is seen as a deteriorating situation. Earlier threats to close the Straits of Hormuz, conduit for 25 percent of the Middle East’s crude oil, prompted a surge in oil prices that have since eased as investors and consumers have seen such comments as largely sabre-rattling.
It would not be in Iran’s own interests to close the Straits as they would be shutting off their exports in the process, and that really would bring the country to its knees. Reuters reported that a threat last week by Iran’s parliament to ban oil exports to Europe, in response to the EU’s approval of a ban on imports from July this year, has since been postponed by Iranian ministers. This is seen as yet another episode of bluster on both sides in trying to achieve mutually exclusive aims with potentially dire consequences if matters get out of hand.
Clerics and senior parliamentarians called for a selective ban on oil exports to Europe, destination for about 25 percent of the country’s sales, in an act aimed to target southern European states that are disproportionately reliant on Iranian crude. But EU officials have said buyers in Greece, Spain, and Italy had been working on alternative supply arrangements and a tightening of physical premiums for crude from Russia, Libya and other Middle Eastern sources suggested that this process was actively ongoing.
Although China and India could conceivably take up the excess oil, they would only do so at a heavily discounted price and have suggested that while they are not willing to stop or even cut back on existing supply contracts, they are unlikely to go out of their way to incur Western (and Saudi) ire by buying up all of the resulting excess.
As a result, Iran, which has already had to revalue the currency recently after its value has plummeted, is likely to suffer far more than Western economies if the sanctions go ahead. Ahmed Qalabani, the deputy oil minister, is reported to have boasted that measures to curtail exports would send oil prices soaring to between $120-150 a barrel, up from $111 this week for March Brent crude.
Source: Lior Cohen, Energy Analyst for Trading NRG
Oil prices have picked up a little on the recent war of words, but are largely on a downward trend this month as the above graph, tracking both WTI and Brent, shows.
Prices are being influenced as much by the wider economic news coming out of the US (and the developing EU debt crisis) as they are by pronouncements from Tehran. Could oil hit $120-150 per barrel? Yes, conceivably it could, but the situation would have to get significantly worse than it is now, such as Iran following through on its threat to close the Straits, or (even less likely) Israel taking resolution of Iran’s nuclear ambitions into its own hands by bombing factories.
Outright confrontation would be highly damaging for world trade, the prospects of a European recession, the oil price and by extension some metals prices (ex. aluminum) that are often closely linked to energy prices. In practice, neither side wants such an escalation to happen, but a train crash in slow motion is what we currently have unless Iran switches tracks and steers its nuclear ambitions away from a head-on collision with the US and EU.