Iran’s unrest will not lead to higher oil prices

Despite oil prices have doubled since the beginning of this year, amid hopes that an economic recovery could boost demand, the price of a barrel of oil has fallen four percent since the presidential election held in Iran last month

A stronger dollar and falling stock markets as well as the presidential election in Iran helped to push the price lower after reaching last week’s eight-month high of $72.68 a barrel.
The question now is how far this election would affect the prices of oil since there are few scenarios that might impact oil supply. The first one concerns Iranian oil exports, and whether crude will continue to flow from its ports despite internal unrest. Logic tells us that it will.

The reasons for this are basic. As much as oil lubricates our — and the world’s — economy, Iran needs foreign exchange far more than the world needs its oil. Especially considering the aforementioned internal unrest, the last thing President Ahmadinejad needs right now is a dollar shortage amid persistent questions about the veracity of the Iranian vote. Conclusion? Iranian oil will flow.

Assuming a scenario whereby violence leads to a shutdown of Iranian oil ports, is it something that should concern us? In the near-term maybe, but this would not materially impact oil prices over the long-term; the reason being that if Iranian producers bring less oil to market, other OPEC countries will gladly increase oil exports in order to fulfil their own needs with regards to foreign exchange.

But what if the U.S President Barack Obama turns up the heat on Iran, and specifically on Ahmadinejad? Could not Ahmadinejad retaliate by refusing to allow Iranian oil sales to U.S interests?
The above is not outside the realm of possibility, but it is also wholly irrelevant to the price of a barrel of oil. For one, the majority of foreign oil that reaches the U.S comes from Canada.

Secondly, while the notion of an “embargo” is at first blush a bit scary, the greater truth is that embargoes of any kind are a major economic myth. Put simply, embargoes are not.
Indeed, in the 1970s, when, despite the early 70s Arab oil embargo (Iran, as a non-Arab country did not participate) placed on the U.S, America imported every bit as much oil during the embargo as before the embargo. Saudi Oil Minister Sheik Yamani admitted after 1973 that the embargo “did not imply that we could reduce imports to the United States … the world is really just one market. So the embargo was more symbolic than anything else.”

Countries can impose all manner of selling restrictions on the items they export, but once those goods leave the port, there is no accounting for where they end up. If every OPEC country were to place an embargo on the U.S, they would still buy their oil, only from those they would not embargoed.

Assuming Ahmadinejad restricts sales of Iranian crude to U.S interests, those same interests will still buy Iranian oil, albeit from those the oil is sold to.
More realistically the oil price spiked both times because the dollar was in freefall, and oil is priced in dollars.

In conclusion, more realistically, oil will continue to flow from Iran because irrespective of who ultimately takes control there, the country needs dollars.

By Ahmed Morsy


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