A disruption of crude oil supply from Iran could pushoil pricesup by as much as $40 per barrel, according to Sabine Schels, senior director and global commodity strategist at Bank of America Merrill Lynch Global Research.
“If you think back to Libya about a year ago, we saw in our estimates oil prices spike by about $20 a barrel just on the back of the Libyan shortfall,” Schels told CNBC. “Iran exports about double the amount that Libya exports, so if we were to lose Iran’s output because of some geopolitical event we could easily see a spike of $40 a barrel.”
Since the start of October, Brent crude prices have risen about 27 percent while Nymex light sweet crude April futures have gained more than 33 percent, despite the fact that global oil demand shrank by 300,000 barrels a day in the fourth quarter of 2011, the first contraction since the 2009 crisis.
Schels believes that the rise seen during the past few months is mainly the result of looser monetary policy and stimulus measures.
“Of the last $20 increase in the brent crude oil price, I would only attribute about $5 toIranand $15 to liquidity and continued quantitative easing,” Schels said. “The supply of money continues to rise, dropping the value of money relative to the value of real assets. Liquidity is having a huge impact on oil prices.”
Schels predicts that prices will jump to record highs should Iran decide to block the Strait of Hormuz, through which about 20 percent of the world's oil passes.
“If we were to lose the Strait of Hormuz, we wouldn’t just lose Iran,” Schels said. “We would lose parts of Saudi Arabia, we would completely lose Qatar, Kuwait and the UAE. This could lead to a very significant spike in oil prices, easily to $200 a barrel.”
A less steep climb in oil prices would still cause major problems for the global economy, Schels warned.
“We know from past episodes of spiking oil prices that the world economy just doesn’t digest high oil prices very well,” Schels explains.
“In our estimates, whenever oil or energy expenditure reaches 9 percent of GDP, we see a very sharp economic contraction afterwards, and we are at 8.3 percent now. So, inferring from that, the maximum sustainable oil price this year in our view is $135 a barrel.”