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Blog: Iran Threatens Oil Prices - What Would $250 a Barrel Really Mean?

Dan Steinbock |Research Dir., International Business, India China and America Institute
Monday, 5 Dec 2011 | 10:44 AM ET
Tehran, Iran
Travel Ink | Getty Images
Tehran, Iran

On Sunday, Iran warnedthat any move to block its oil exports would more than double crude oil prices. That would certainly have devastating consequences on a world economy and the major advanced economies, which are already shifting to recession territory.

“As soon as such an issue is raised seriously the oil price would soar to above $250 a barrel,” Ramin Mehmanparast, Iranian Foreign Ministry spokesman, said in an interview for Asharq Al-Awsat.

A day later, New York Timesreported that a recent explosion at a military base near Tehran was a major setback for Iran’s most advanced long-range missile program.

Global recovery could certainly live without (still another) crisis, especially in Iran, the world's fifth biggest exporter.

What would $250 mean?

In the past, Washington and Brussels have been reluctant to target Iran’s central bank or oil exports for fear of driving up oil prices.

Despite strong oil prices, sanctions have weakened the spending power of the Ahmadinejad government. The expected phasing out of fuel subsidies has gone relatively smoothly, but it is contributing to inflation, which is said to exceed 20% (Iran’s central bank no longer releases the data).

Iran is increasing its domestic refining capacity, but a possible cut off of refined fuel imports would deal a heavy blow to the economy – as would Teheran’s own more aggressive regional stance.

The showdown between Iran and the West serves to highlight the fact that, after the global crisis will fade into history, difficult problems loom ahead. At the end of the 1990s, the nominal crude oil price was still less than $20 per barrel and it took another half a decade until it climbed to $50. Nonetheless, right before the onset of the financial crisis, it peaked at almost $150.

Today, oil priceis already hovering around $100. As supply is declining and demand is increasing, any sign of recovery will boost the price of the crude.

If you want to understand the impact, imagine the world as it existed after the end of World War II; that is, before the postwar globalization.

When oil prices were still around $20 per barrel in 2000, transport costs amounted to an average tariff rate of 3%. At $150 per barrel, the rate is 11%, which was the average level of the 1970s. If the price will hit $200, it would reflect the kind of average tariff rates that prevailed in the mid-1960s.

And if the price soars to above $250, we are back to the 1950s.

Export threats in the West

In Washington, Iran has already been targeted by sanctions vis-à-vis weapons development, trade and investment, nuclear materials, financial dealings, assets, and refined gasoline.

Last Thursday the U.S. Senate also voted to penalize foreign financial institutions that do business with Iran's central bank, which takes payment for the 2.6 million barrels Iran exports a day. Meanwhile, the EU is considering a U.S.-style ban on Iranian oil imports.

However, neither Washington nor Brussels has yet finalized the move against the oil trade or the central bank. Both are concerned of the potential impact on the global economy of restricting oil flows from Iran. But in Europe, the British embassy attackhas dragged relations to a long-time low.

The West is not President Ahmadinejad’s only nightmare. Iran is preparing for the March 2012 parliamentary elections.

Ahmadinejad is struggling not only against the reformists hoping to resurrect the Green movement, and the supporters of the Supreme Leader Ali Khamenei. At the same time, a rapidly-evolving fraud case is shifting alignments among Iran’s conservative elite.

An investment vehicle managed by Amir Mansour Khosravi has been charged with expropriating US $2.6 billion from half a dozen Iranian banks, while some 30 senior Iranian bankers have fled abroad.

And even if Teheran could miraculously boost growth, its financial sector cannot support it in the next few years because credit has doubled to over 90% of GDP in the past decade.

In these circumstances, any external intervention would serve to destabilize Iran and oil price, while rallying support for hawks in Iran and the West. Economic recovery would be a secondary priority.

Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).

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