Iran has threatened to use its oil as a weapon – brandishing it as a counter threat to US grumbles about its nuclear programme. In a newspaper interview, Iran’s Opec representative Hossein Kazempour Ardebili predicted that the price of oil would rise to at least $100 a barrel if Iran moved to cut its supply of 2.5 million barrels per day from the market.
Should we fear this threat? A little – but not much.
Iran oil embargo: why we needn’t be too afraid
Even Mad Ahmadinejad wouldn’t cut off his nose to spite his face. I don’t think he is that stupid. He’s got too much to lose.
Firstly, Iran is simply playing a political game – just like when it took Mr Bean et al hostage a few months ago. It was a game of chess, using real pawns – and he is just continuing with his brand of political shenanigans.
Of course, that incident caused an oil-price spike and not a single drop of oil stopped flowing. This implies there is a real and substantial threat of a spike in oil prices if Iran actually does turns of the oil taps.
I don’t think we should get too fired up about it. Sure, I believe that the price of oil is on a long-term uptrend as supplies dwindle, but I do not expect a catastrophe around the corner – unless the US hawks manage to push through a strike on Iranian targets. However, I do not believe that sort of action is politically viable in the US at the moment – even for George W Bush.
Iran oil embargo: damaging to economy
Iran is very unlikely to just stop shipping oil – it can’t afford to. Iran’s economy relies heavily on oil export revenues, representing 80%-90% of total export earnings and a whopping 40%-50 % of the government budget.
Despite higher oil revenues over the last few years, Iran still has a chronic budget deficit; $16bn in 2006. This has been caused by substantial state subsidies on food and petrol. The country may threaten to cut off its own economic life blood, but it would not do that unless the situation got very extreme.
The country has also been attempting to attract billions of dollars worth of foreign investment and has been reducing restrictions and duties on imports and creating free-trade zones. However, progress has been slow as foreign investors are – quite rightly – cautious about putting their money in the country.
If Iran cut off even part of its oil this plan would be completely derailed as confidence in the country as an investment proposition would be even lower than it is now.
So, I think it is unlikely that Iran would turn off its taps completely. However, the country could try and use the fabled “oil weapon” and embargo the US. This would create less financial problems for the country – but it would fail.
Iran oil embargo: unlikely to succeed
If Iran tried to embargo the US there’s no way its plan would succeed – once an oil tanker has left port there’s no way the Iranian government could control the ultimate destination of this cargo.
My uncle was a Radio Officer for BP, spending his entire working life on oil tankers. When I was young, I spent many a fun afternoon in Grimsby (yes it is possible to have fun in Grimsby – but it is a rare occurrence) playing on his ship when it was in dock. It was even more fun when they were unloading ballast. Believe me. There’s no way a government will tell a foreign oil tanker crew what to do when it is out of their jurisdiction. They are strong minded people in the oil industry – you have to be.
Indeed, following the 1973 oil crisis in which Opec tried to embargo oil to the US because of its support of Israel in the Yom Kippur war, the Saudi oil minister conceded that the embargo did not imply that it could reduce imports to the US because the world was really just one market. He said the embargo was more symbolic than anything else.
Given these realities, the rhetoric emanating from Iran looks more than a little bit like bluster. Thankfully, the markets are not over-reacting to this statement; which is unusual for the fishwives in the oil trading market.
This is good news. I believe we should take doomsday predictions about the power of Iran to cripple global markets with a grain of salt.
In Leonard Wibberley’s book The Mouse That Roared and its follow up series, the tiny Duchy of Grand Fenwick always won in its posturing with the great powers of the world.
Those books, however, were works of fiction. I am not saying big, powerful players always get what they want, but the odds are on their side. I think Iranian oil-embargo threats are just posturing. They should be regarded as that.
By Garry White for his ‘Garry Writes’ newsletter. To find out more about his monthly newsletter, Outstanding Investments, which expands on his views and makes specific recommendations in the resource, infrastructure and biotech sectors, click here: Outstanding Investments
Investing in shares can lose you some or all of your investment. Never risk more than you can afford to lose. Small company shares can be illiquid and carry higher risk than other shares. Past performance is no guide to the future. Consult a financial advisor if unsure. Fleet Street Publications Ltd. 020 7633 3600