Iran Sanctions Push Oil Prices Into Recession Territory

By Moon Of Alabama

February 20, 2012 "Information Clearing House" ---  IAEA inspectors are back in Tehran for talks about Iran's nuclear program. The outcome will not really matter. The U.S., and the people who pull its strings, is not aiming for an Iran that has no nuclear capabilities but for an Iran that does what it says, especially with regards to Israel. To achieve that necessitates regime destruction by force.

The sanctions on Iranian oil and financial transfers by the U.S. and the EU stooges are preparations for that. The hope is that they will provoke Iran to attack first or to at least make Gulf of Tonkin like incident, probably involving the 40 year old USS Ponce, plausible.

But the sanctions create a big problem. They will tanks the world economy. Back in December I wrote how the Iran sanctions will become a "self-inflicted wound":

Those western countries that will move away from Iranian oil will have to pay higher prices as the possible sources for their purchase will be reduced. This will put more pressure on their economies none of which are in good shape. With less flexibility will also come a higher risk should some event, like an explosion at Saudi facilities, reduce the production available to them.

In total the markets will be more nervous and the risk premium included in oil prices will go up. Iran and the other Persian Gulf countries will make more money. Everyone else will have to pay more for oil with the price increase for the west likely much higher than for the east.

In January I followed up on that:

Since then the price of oil has increased from some $104 per barrel Brent crude to $113/bbl today. Considering that in 2006, with most economies humming, Brent was around $70 and that unlike then major economies are now still in recession the price hike is enormous. Iran is clearly showing that it too can play the economic sanctions game. Since mid December it increased its oil export income by $22.5 million per day which further damages "western" economies.
...
More sanctions may well come. But they will hurt western economies more than Iran. They will be responded to by Iran tit for tat with ever increasing oil prices. Iran has already announced more maritime maneuvers in the Strait of Hormuz. When those and the accompanying propaganda have passed the price of Brent crude may well be at $120/bbl and the U.S. economy on its way into another downturn.

Just one month later we are there.

The EU decided that it will stop oil import from Iran by July 1. Iran responded yesterday by stopping oil sales to Britain and French. As those sales are minimal the stop is only significant as a sign of seriousness from Iran to its south European customers who have been told to either commit to long term oil purchase agreements with Iran by March 21, thereby breaking the EU sanctions, or to be cut off by then. For the bancrupt Greece, Italy and Spain, which each import significant amounts from Iran, that would create great problems.

When the EU announced its decision to stop imports from Iran the propaganda claimed that the Saudis would make up for any lack of crude oil and somehow hold oil at $100 per barrel. That was some wishful thinking:

Saudi Arabia, OPEC’s largest crude producer, reduced oil output and exports in December from November when it produced the most in more than 30 years, according to the Joint Organization Data Initiative.
...
The figures Saudi Arabia’s government submitted to JODI for December’s crude oil output were close to those estimated by the International Energy Agency. The IEA said in its January monthly report that Saudi output was pegged at 9.85 million barrels a day. The IEA estimated January’s output for Saudi Arabia to be the same as December’s. The Paris-based agency estimated Saudi Arabia’s spare capacity for December at 2.15 million barrels a day, which makes about 75 percent of OPEC’s effective spare capacity during the month.

There are doubts over the extend to which this Saudi "spare capacity" really exists. Sure the Saudis have some old wells they could probably restart but those do not produce light sweet crude but rather nasty stuff that is difficult to refine. Another question is how long that spare capacity brought into production would be sustainable.

The oil traders know that these questions exist:

Oil prices jumped to nearly 105 dollars a barrel - a nine-month high - in Asia today, after Iran said it halted crude exports to Britain and France in a dispute over its nuclear programme.

Benchmark crude was up 1.75 to 104.99 dollars a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. Earlier in the day it rose to 105.21, the highest since May. The contract rose 93 cents to settle at 103.24 a barrel in New York on Friday.

Brent crude was up 1.52 at 121.10 dollars a barrel in London.

Note that the benchmark WTI price of $105, which is set at the pipeline hub in Cushings Oklahoma, is currently distorted. Cushings is oversupplied and lacks pipelines that could transport the oil from the U.S. midwest to the coasts. The Brent crude price is therefore what sets the consumer price for gasoline in large parts of the U.S. as well as in Europe.

Brent at $120 a barrel is global recession territory. The Chinese, who just renewed their long term contract with Iran, will likely get their oil cheaper than that.

So we are right there where I predicted sanctions would lead.

Sanctions increase oil prices and the west screws itself over with them by pushing itself back into a deep recession. A war with Iran would make the situation even worse. That is likely why the U.S. as well as the UK are telling Israel to hold still and to not plan some mischievous stunt.

As with Syria the west, mainly Obama, has painted itself into a corner. What is the way out?

Orders could go to the IAEA to exculpate Iran's nuclear program and to declare that everything looks solvable and fine. Negotiations could be held, probably with the help of the Chinese, and the threat of "all options are on the table" and regime change could be withdrawn. In a tit for tat Iran would agree to stop the 20% enrichment for the Tehran Research Reactor at a certain amount like two reload charges and some sanctions would be removed. An agreement to implement the IAEA's additional protocol in Iran would be the next step with more sanctions removed. An "clean" label from the IAEA would follow, all sanctions would be removed and normal relations with Iran would be restored.

But the chances that Obama will be willing and/or able to go that way seem very small to me. So what will it be? An illegal war of aggression against Iran and a huge recession? No war, sanctions and a recession? No sanctions and peace in our time?

Your guess is a good as mine. Whatever it may be, unlike the west, Iran is prepared for the worst.

www.moonofalabama.org

 

 

 

 

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