Oil Shock

Doomsday Scenario

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What makes Iran important for global crude oil markets is its geo-strategic location, not its volume of exports

If the ongoing war of words between old foes Israel and Iran over the latter’s nuclear programme turns into a war of weapons, it would inflame not just the Middle East but crude oil prices as well. How high might they go? Anything between $175 and $290 per barrel, warns The Rapidan Group, a US-based consultancy that has just released a study of such a war scenario, predicated on a surprise attack by Israel on Iran sometime in March 2012.

The latest flashpoint is a report by the International Atomic Energy Agency which casts grave doubt on Iran’s denials that it is developing nuclear weapons. A fearful Israel, say analysts, might be tempted to carry out a repeat of its 1981 attack on an Iraqi nuclear facility (on Iran this time), sparking off a wider war and disrupting oil supplies from the Gulf. “A large oil price spike resulting from a [war] threat or an actual disruption in crude flow would be particularly challenging for India, which imports about 75 per cent of its oil, 70 per cent of which comes from the Middle East,” says Robert McNally, president of The Rapidan Group. Iran exports about half its overall output of 4 million barrels per day, 1 million barrels to China, India and South Korea alone. While Western countries have huge oil reserves to tide over supply disruptions, India’s stocks can barely last a week, making the country especially vulnerable (China has enough for a month). “Shortages would be economically and socially destabilising [for India],” warns McNally.

Yet, what makes Iran important for global oil markets is not its actual exports, but its geo-strategic location, which lets it control the Straits of Hormuz, known as the Gulf’s oil gateway. About 15.5 million barrels of oil passes through this narrow stretch every day, and Iranian forces could clamp it shut (which is why it is called Iran’s ‘non-nuclear deterrent’). “If Iran blockades the straits, then oil prices would obviously jump,” says Arvind Mahajan, an oil expert at KPMG. It would hurt Saudi Arabia’s ability to pump more oil, he adds, because its spare capacity (which lets it regulate oil prices) would be rendered useless if oil tankers cannot exit the Gulf.

Given the Great Recession, a doubling of prices, or even a sharp spike, would be an economic catastrophe for all oil importers. To forestall such a global crisis, say analysts, Israel’s insecurities need to be addressed in earnest. As of now, popular uprisings in the region have only turned the Jewish state lonelier still. The region’s peace dynamics need an urgent boost.