RIYADH, April 15: Stakes are increasing. With ominous signs all around and clouds gathering on the horizon, a storm on the energy scene appears inevitable. In case hostilities between the US and Iran break up, the energy markets would be shaken to the core and $100 a barrel crude price may not be that improbable as it is today.
In fact in view of the gathering clouds on the scene, the markets have already started firming up. Prices are once again flirting with the historic $70 a barrel mark touched briefly late last August. Crude markets are starting to be firmer. It is no more just an issue of supply and demand. Extra market forces are once again very much in operation.
The ongoing Iran–US tussle is matter of great concern for the energy markets. In a situation, where virtually every once concedes, that the supply-demand balance is currently at best precarious, the emerging war theatre in the oil producing region is an unbearable burden on the markets.
Iran today is the second largest oil exporter in the world. With a production capacity of around four million barrels a day and an export of around 2.5 million barrels a day, Tehran fills up a very significant part of this balanced equation today. God forbid, if things turn to worst, it could be mayhem in the market. Not much spare capacity is available all around. While Opec has been producing almost at its peak, for some time now, the markets are just balanced. There is very little spare capacity to be found elsewhere. Saudi Arabia is perhaps the only real exception as far as spare capacity is concerned. According to estimates and projections, Riyadh is an exception and not the norm in this case. It is still committed to maintaining a spare capacity of at least 1.5 million barrels a day -– indeed at considerable cost to the Saudi exchequer.
But even this spare capacity is not sufficient to meet the gap that could arise in case Tehran is unable to produce and export. Indeed Tehran has vowed not to stop supplies even in case of hostilities, as some say that Tehran would not like to cut its financial lifeline by stopping the exports of its major exportable product -– crude oil. Yet in case of another round of hostilities breaking out in the region once again, to what extent Iran and other regional producers could continue producing at normal rates is at best debatable at this stage.
Then the quality of crude available as spare currently to replace any Tehran outage is also another point to consider. Last year, when Opec had on table some two million barrels a day of crude, there were not many takers to it. Apart from markets reasons, one of the causes put forward by the market was the fact that the crude on offer was the heavy type, which the refiners avoid until they have no other option. The spare capacity that could now be made available to replace the Iranian outage, in case that happens, would mostly be of the heavier type. And indeed there are not many takers for this type of crude at this stage.
However, apart form the above simple mathematics, another factor is now coming into play. The entire last week, Iran has been conducting ware games -– apparently with a specific aim. During the war games Iran test-fired a new land–to–sea missile as well as a rocket torpedo. According to some, Iran could resort to other choices to impede the flow of crude through the Straits, including sinking some of its own ships to block sailing or mounting ‘swarms’ of small missile boats. Analysts strongly feel now that in case pushed to the wall, Iran could resort to a wide range of weapons and tactics to disrupt the flow of crude through the Straits of Hormuz.
Some two-fifth of the global oil trade — roughly around 20 million barrels a day pass through the narrow Straits and any problem en-route could bring catastrophe on the region and indeed on the globe. The Straits of Hormuz, between the Gulf and the Sea of Oman, is a strategic corridor for the oil exports.
“The export of 20 million barrels (of petrol) through the Straits of Hormuz highlights the significance of the region, where the manoeuvres are held,” commander of Iran’s elite Pasdaran-e-Inqilaub (Revolutionary Guards), General Yahya Rahim Safavi told the press at the conclusion ceremony of the war games. “The importance of the ... manoeuvres lies in the time and geographical place they are happening as well as the arms used,” he told the local news agency. It was indeed a part of psychological warfare.
The message to the energy hungry world was plain and simple -– indeed if people are ready to pay any attention to it. Iran has indicated that it has the will and the power to impede, if not block completely -– the strategic maritime corridor -– as far as crude shipments are concerned.
Are there people, who really matter in this case, seriously taking the message and its consequences? Stakes are indeed high -– one has to understand before making any advances, as was done on Baghdad. The basic message remains, Tehran is no Baghdad. Although despite the clamouring on May 1, 2003, ‘Mission Accomplished,’ the mission in Baghdad is yet to be accomplished. And any other such (mis)adventure may simply prove to be disastrous, specifically for the crude markets. Could the world sustain that? Although perhaps the US economy could still sustain the $100 a barrel price, as unwittingly the neocons seem to believe, the global economy definitely could not.
And despite the IEA call on Opec to ram up crude production, Opec not be held responsible for something which is completely beyond them. The blame would squarely lie on some other shoulders indeed, one cannot help concluding.
