Price of an oil terror

Fears regarding the shrinking oil supplies from the Middle East triggered by a possibility of a military conflict with Iran are the main factor that boosts the petrol prices up. That’s what Barack Obama said on TV yesterday. According to him, vain conversations about the possible war in the Middle East (backed by certain experts and politicians) should be stopped.

During the Monday trade session in New York (on March, 12^th) price of April futures contracts for Light Sweet oil exceeded $106 per barrel, while the price of North Sea Brent oil exceeded $125 per barrel. Last time the prices reached that level in last April-May, when the civil war in Libya (the richest oil-bearing state of North Africa) was flaring up. Yet, Libya has been supplying merely 2% of oil that is traded at the global market. This time the stakes are higher. Carsten Fritsch, raw resources market analyst of German Commerzbank, believes that Euro-Iranian crisis has triggered the prices’ growth this time. Iran happened to be way closer to Europe, than one might have thought looking at the map.

The only countries that outstrip Iran in terms of oil deposits are Saudi Arabia, Venezuela and Canada. Today the oil share of this country makes 7.5% of global production (2011). Geographical situation of Iran is another important aspect. The Strait of Hormuz is an oil path for every tanker, carrying oil from the Gulf States — Iraq, Kuwait, the UAE. At least 20% of all oil produced in the world is carried through this route.

When Barack Obama announced the imposition of financial sanctions against Iran in the end of last year, it responded with threats to block the Strait of Hormuz. For the global economy that stress would have meant the same kind of shock as an oil embargo. Oil prices have stoked up immediately. In the end of January, the European Union forbade its members to sign new oil contracts with Iran, while all the previously signed ones are to be suspended since the June 1^st. Thus, Europe decided to hit Tehran’s pocket. According to American consulting company HIS CERA, last year oil profits of the Islamic Republic of Iran made up $100 billion. Therefore, European embargo will cost Iran 20–30 billion.

At first glance, embargo for Iranian oil supplies to Europe is supposed to mean less to Europe, than it is to Iran, since Europeans used to buy merely 5% of the imported oil from Iran. Last year alone the volume of this purchased increased to 7% due to the civil war in Libya. However, when the embargo was announced, price of European North Sea Brent oil went up 11%, i.e. $15 per barrel. Prices’ curve has taken the steepest jump, when Tehran stated that it denounces its supplies to France and Great Britain. The reason for that is plain — traders started adding the risk extras to the oil price itself. Fillip Petersson, analyst of Swedish SEB, gave the following comment to the situation:

“Consumers compete for securing the future supplies. Oil is plenty for now, but the prices are going up, because oil-refining plants apprehend the aggravation of the conflict between the West and Iran”.

Nevertheless, due to Iranian oil embargo (that has already become a bilateral one) quite palpable problems await Europe. Major buyers of Persian oil are coincidentally the least financially-healthy members of the EU: Greece, Spain and Italy. Ban on Iranian oil may cost the oil traders from those countries a pretty penny. Greece that dances on the edge of bankruptcy, fetches itself in the utmost difficult situation — according to Reuters reports, diplomats of the EU have done a hell of a job to talk the Greeks into joining this embargo. And there is nothing surprising about that — due to the financial crisis, Greeks have faced certain troubles with getting the banking backing of oil contracts. This forced Greece to renounce oil supplies from Russia, Azerbaijan and Kazakhstan. Only Iran was up to risk supplying oil without guarantees, which is why more than a half of raw oil that Greek refineries used to buy, was of Iranian origin. It is highly improbable that Greeks would have ever supported the embargo hadn’t they secured the supplies from other sources in advance.

“Lybia might serve as an alternative source of supplies — oil production level is gradually restoring to the pre-war level” — spokesman for Greek Ministry of Foreign Affairs Grigoris Delavekuras told journalists last week. Growth of oil prices is already punishing the EU economy, which is not at its best at all. Last week barrel price reached the record-breaking value of €93.6, thus, outstripping the last record (July of 2008) by 14 eurocents. Oil prices transform from economic factor into a political one.

Denial of Iranian access to the SWIFT wire transfer system that the Western bankers imposed cuts both ways too. At first this would surely hinder Iranian international trade, but the reports of information agencies give us substantial proof of the fact that the trade partners of IRI successfully discover ways to go around these discriminatory steps. National currencies, barter deals and the “eternal values” (like gold) will be used instead. This may even push Russia towards the long-conceived implementation of its reform of hydrocarbon trade — the country wants to trade them for rubles. Altogether this may marginalize dollar as the universal currency of the natural resources market, which may backfire at American itself. As of now, U.S. Secretary of Finance Timothy Geithner, troubled by the boost of oil prices, announced the possibility of throwing a part of American strategic oil reserves into the market. Globalization of global trade makes it impossible to oust anyone from the market without repercussions for the rest. Laws of economy, whether you like it or not, are beyond national legislation — even if it’s the legislation of a superpower we are talking about.