Counting on Teheran

There is no telling exactly how much global oil prices will spike upwards if the United States does give a go-ahead for an Israeli strike on Iran’s nuclear facilities. During the last three years, dark hints regarding such a strike have been thrown out, widening the so-called ‘fear premium’ on the per barrel price of oil. However, the probability of such a strike is low. The US would be stupid to green-light such an attack and risk imposing record oil prices on the global economy, besides turning West Asia into a ‘ball of fire’, as warned by Mohamed El Baradei, head of the UN’s nuclear watchdog agency, IAEA.

However, if this strike does come to pass, Iran would definitely counter-attack and close down the Strait of Hormuz through which, according to the US Energy Information Administration, two-fifths of all globally traded oil flows. The closure of this strategic channel — through which 16-17 million barrels of oil and 2 million barrels of oil products are carried on tankers every day, including fuel oil — will seriously disrupt global oil supplies. This will be a serious shock that can plunge the global economy into a recession like the previous oil shocks did during the early and late 1970s.

In a region that holds 55 per cent of the world’s known reserves of oil, such a disruption would naturally result in oil prices zooming upwards. With prices already close to $137 a barrel, the big question is how high will they rise. “The prices would go unlimited... I can’t give you a number”, warned Abdalla Salem El-Badri, Opec’s secretary general. The reason for this imprecision is that it is difficult to replace Iran’s output, the second largest producer after Saudi Arabia, due to the limited spare crude oil production capacity worldwide that is down to 2 per cent of production from an average of 3-5 per cent.

Scenarios on the Strait of Hormuz and the threat of an oil shock presented before the US Joint Economic Committee last year indicate that the Strait’s closure has the potential to reduce the flow of oil by far more than any previous disruption, including the Arab oil embargo of 1973. Twenty per cent of the global consumption of 86.7 million barrels per day passes through the Strait while the embargo of 1973 resulted in a loss of 9 per cent of world oil consumption. The price increase necessary to reduce world oil consumption by the 16-17 million barrels a day taken off due to disruption for a month is $230 a barrel!

With global oil markets already nervous in anticipation of a strike on Iran, the big question naturally is what implications it would have on India. Prime Minister Manmohan Singh has indicated that international oil prices refuse to come down; that their inflationary impact has been considerable as it not only pushes up fuel costs but also commodity rates all over the world. Obviously, a surge further to $230 a barrel with a strike on Iran will widen the country’s oil import bill, besides worsening inflationary pressures ahead of crucial election in states and a national election in 2009.

More importantly, it will considerably complicate India’s efforts to enhance its energy security by pursuing the Iran-Pakistan-India gas pipeline. After years of delay, this project is finally ready for signing in a month’s time. Now, with the prospect of a strike, various other projects worth over $20 billion that India has been eyeing in Iran will also be affected, including various oil and gas exploration project proposals.