Iran's crude threats
Oil is surging to seven-month highs on worries the Iranian navy will close the crucial Strait of Hormuz transit point. Here's a look at the potential impact.
So, 2012 started right where the old one left off: Turmoil in the Middle East pushes crude oil higher, defanging the Federal Reserve on inflationary fears and threatening an already weak and fragile economy.
Sure, it's all about Iran this time and its boisterous saber rattling and nuclear ambitions instead of the blossoming of democracy during the Arab Spring. Specifically, with the European Union moving toward an embargo of Iranian oil imports, and with Israel and the United States getting itchy trigger fingers over Iran's nuclear program -- which claims it just enriched its first fuel rod -- the regime there has stepped up its threats to shut down the Strait of Hormuz through which 17 million barrels of oil per day flows. That's worth 35% of seaborne traded oil.
Yet the result is the same: Higher energy prices and the predictable consequences that will surely follow, as the U.S. Oil Fund (USO) closes at its best levels since June. Here's why.
It started over the Christmas holiday as the Iranian navy conducted a 10-day exercise in the strait which finished with a test firing of two long-range anti-ship missiles that could be used to target American aircraft carriers. The aircraft carrier USS John C. Stennis steamed right through the Iranian exercise on December 27 en route to the Arabian Sea in what surely could be described as an American show of force.
Belligerent nations, like schoolyard bullies, always respond quickly to tests of resolve.
Sure enough, earlier today an Iranian military general said the country was prepared to take necessary action if the Stennis returned to the Persian Gulf. Since the U.S. Navy's Fifth Fleet is stationed in Bahrain, the Stennis, or another carrier, will surely return. Indeed, the Pentagon said later in the day that the United States will continue to operate in the Persian Gulf.
There's good reason for this. Some 25% of the world's tradable oil supply passes through the Strait of Hormuz, with a majority of Saudi Arabia's and Iraq's output transiting there, as well as all of the output of the U.A.E., Kuwait and Qatar.
And the threat is serious. Standard Chartered analysts believe that if Iran made good on its threat (a decision on a European embargo is due by the end of the month), the loss of 17 million barrels per day would not be easily offset. The Saudis could send another seven million barrels through its East-West Pipeline into the Red Sea, but that would add another five days to any trip to Asia.
Other options include a new pipeline in Abu Dhabi that could carry 2.5 million barrels per day into Oman. Another 1.7 million barrels per day could be sent through the Iraq Pipeline across Saudi Arabia (IPSA). There has also been talk of restarting the out-of-service Trans-Arabian Pipeline to Lebanon, which has been shuttered since 1990 and was originally constructed in 1947. But that would only add another 500,000 barrels per day.
As you can see, supplies would be tight.
Yet, Standard Charted notes that the recent price action in oil suggests traders aren't yet pricing in a disruption of this scale. Instead, the more likely outcome is that Iran's exports are curtailed as Europe stops buying and its supply is diverted to Asian customers.
Even this, if it's enough to keep crude near $100 a barrel, will pressure already sensitive consumers as well as keep inflation too high for the Federal Reserve to unveil another round of stimulus, as it's been hinting of via mouthpieces in the media. When the $600 billion bond buying initiative, the second round of "quantitative easing" we've seen so far, was started in late 2010 crude was trading near $70 a barrel. Consumer price inflation was also running at around a 1% annual rate, compared to more than 3% now.
Assuming Iran is bluffing, the biggest threat is that its chest thumping will keep the Fed on the sidelines by keeping energy prices aloft. Chairman Bernanke, meet Iranian Brigadier General Ataollah Salehi.
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Bring it on Iran, I don't think we are too worried. Your missals are like toy rockets compared to what we would do to your Navy. lol.
It's time to put Iran in it's place! we just need to park a couple of destroyers off there cost.
Then tell them publicly that if they want to make good on there threats then to do it. This saber rattling by North Korea and Iran has to stop. They need to learn that if they keep making threats to the rest of the world then they will end up like Sodom did.
The Iranians want our carrier in the gulf. It is too congested for a carrier to be effective. Too much risk of an enemy combatant getting too close.
When the carrier moves out of the gulf is the time for the Iranians to worry!
One thing that you fail to mention is that every major down turn in the U.S. economy for the past 40 years has been preceded by an oil shock.
"Iran's Crude Threats?" Tony, are you borrowing from Leno's writers now?
The U.S. and EU are really putting the screws on Ahmanjinedad and the Ayatollah. Although Khameini is supposed to be the last word as the "Supreme Leader", A-man generally presents himself as maniacal and unpredictable. Since he is not out front on this campaign, I suspect the Islamic Republic itself is pretty serious this time. In either case, if current events results in higher oil prices, this will shake the economy and the patience of the worlds economies to its core. The only winners may be China or Russia. Another case for renewable energy I say.
Also, I'm a genie's bottle and stones throw from Iran at the moment, but I don't feel particularly threatened by the latest round of the Persian Regime's saber rattling. However, it doesn't hurt to have a few good Patriot Missile batteries around the corner.
Our energy policy needs to be changed. We are on the mercy of middle east countries as our appetite for oil is ever increasing, and on the other hand those countries will always be against us. Hence the oil will remain a sensitive and necessary item for us. The world population is increasing (specially in Islamic countries) and soon to pass 10 billion mark within 20 years time. This means that demand for all items including oil will keep on growing more and more and price will keep on going through the roof.
On the other hand oil, natural gas etc item's availability will keep on depleting as the mother earth has a limited amount resources available. The demand for energy and food will be two major items that will be becoming more and more expensive.
The energy demand can be met if we put our focus on developing safe NUCLEAR FUSION energy. This can be a solution we really focus on developing a safe method of producing it. This will be a perpetual form of energy and will solve the energy requirements of the future. Even a car, or plane can be running on this energy of developed in a safe way. Instead of being afraid of this form of energy, it is time that we need to start looking producing this form of energy safely.
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