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Page added on March 18, 2012
Power Struggles at the Persian Gulf – is Another Gulf War Imminent?
Iran is currently the fifth-largest oil producer in the world, the second-largest producer in the OPEC, and the third-largest oil exporter worldwide. Of the total production of almost 3.5mn barrels/day, 2.285mn barrels/day were exported last year. 0.8mn barrels/day are shipped to the OECD countries in Europe, 0.6mn barrels/day of those to the EU and 200,000 barrels/day to Turkey (50% of the Turkish demand). But Asia is the most important export market at 1.5mn barrels/day, with China alone accounting for 550,000 barrels. Japan, India, and South Korea are also important trading partners.
Destinations of the Iranian oil exports
Source: EIA
On 31 December, US President Obama ratified a law that was intended to step up the pressure on Iran. In their strictest sense, the economic sanctions imposed against the Iranian central bank and the financial sector mean that international banks will be excluded from the dollar system if they maintain their business relations with the Iranian central bank. The measures are aimed against foreign private banks, state-controlled institutes and central banks.
Exchange rate US dollar / Iranian rial
Sources: Bloomberg, Erste Group Research
This has resulted in an immediate isolation of Iran from the dollar system. Due to the dollar shortage, the Iranian rial depreciated by 30% against the US dollar within a matter of days . Due to the strong dependence on imports in most sectors, inflation has begun to turn into hyperinflation. The sanctions have already had a drastic effect on everyday life. Since the imports of commodities cannot be paid anymore, grain imports (among others) are now paid in gold. Oil has also been offered as currency in barter transactions. The price of rice has doubled since the beginning of the sanctions and the price of corn has tripled. It is impossible to get foreign exchange on the black market. Iranian banks increased interest rates to 20% in order to slow down the bank run.
The government knows that the level of discontent due to the drastic price increase of food and energy is enormous and might escalate soon. Given that parliamentary elections are imminent (i.e. to be held in March) the opposition might now call for mass demonstrations. Therefore we do not expect the situation to relax in the near future.
Within a few weeks, the US have thus isolated Iran from the international banking sector, destroyed the currency, and induced hyperinflation. In terms of military strategy, the US seems to be following “McCollum’s memo” – many details are a 1:1 copy of the oil embargo against Japan that was imposed on 25 July 1941, which pretty much meant a stab in the back to the Japanese, because of their extremely high dependence on oil imports. On 7 December 1941 Japan eventually attacked Pearl Harbor .
On 1 July, the EU also imposed a complete embargo on oil and oil products. Deliveries of equipment for the Iranian oil industry and investments in Iranian oil companies have also been disallowed. And for the first time, sanctions against the Iranian central bank have been imposed: its assets were frozen in the EU. We believe that eventually the sanctions will just turn into oil price subsidies for Asian buyers. China and India will be happy to fill in at significantly better terms for the European importers. We think that the consequences will not only harm Iran, but ultimately the entire world.
A look into history supports this view. The Yom Kippur War in 1973, the Iranian Revolution in 1978, the first Gulf War from 1980 onwards, and the first war at the Persian Gulf from August 1990 onwards all led to a decline in global oil production of 4-7%. As a consequence, the oil price increased by a minimum of 30% and a maximum of 70%. Each one of those wars was followed by a recession in the US.
Oil crises and average production outages
Sources: EIA, ML GCR, Hinde Capital
The sanctions will also expedite the downward trend of Iranian oil production. Numerous foreign project managers will leave the country and the access to capital, technology, and human resources will gradually dry up. According to National Iranian Oil Company, USD 30bn would have to be invested annually in order to achieve the production target of 5.15mn barrels/day until 2016. We believe this is unrealistic. Therefore we expect production to fall to slightly less than 3mn barrels/day by 2014. If domestic demand continued to develop as dynamically as in the recent past (which, however, is doubtful, due to the recent cuts in subsidies), oil exports would drop below 1mn barrels/day by 2015.
By. Ronald Stoeferle of Erste Group
7 Comments on "Power Struggles at the Persian Gulf – is Another Gulf War Imminent?"
Ken Nohe on Sun, 18th Mar 2012 12:24 pm
There may be a rationale for the US to go to war, which I do not fully understand, but it is impossible to grasp why Europe and Japan and tagging along since their economies will be devastated.
Maybe the illusion that the war will be short and followed by a sharp drop in oil prices. This would be a blind belief in luck and a suspension of the law of unintended consequences.
To quote a great American philosopher: In war “shit happens”!
BillT on Sun, 18th Mar 2012 12:38 pm
OilPrice.com, says it all. An article by Big Petroleum to push oil prices up. Maybe there will be another Middle East war, but it will be devastating to all involved and many who are not. Look at that wheel of buyers. All are in financial trouble already, except China which still has about a trillion Walmart dollars to spend. As for Iranian oil sales to stop … not if India, Japan and China have their say. They are ALL arranging trade in other than USD. And if there is a war, it may be another Vietnam…or worse as there is no guarantee that Russia and/or China will not wade in on Iran’s side.
Kenz300 on Sun, 18th Mar 2012 6:03 pm
The oil companies and the oil producers all like oil price spikes. They make windfall profits. We are hooked on oil and backed into a corner. The oil monopoly on transportation fuels must end.
Arthur on Sun, 18th Mar 2012 9:09 pm
Bill, Germany is more or less booming, and the rest is not doing too bad either. Small Greece is indeed a basket case and so is small Portugal. Spain’s economy is bad in terms of unemployment but they have very low debt. Italy has 120% debt but they have a competitive economy and they are seriously working on their debt problem. The rest is triple AAA or somewhat lower. The average EU debt is 80% GDP, which is manageable. The only question lately was: “shall we let Greece go broke?”. They should have, they didn’t.
@Kenz300: the largest profiteur of a hot conflict in the Gulf would be Russia.
BillT on Mon, 19th Mar 2012 2:10 am
Arthur, Germany is NOT booming. It is balancing on the edge of exiting the Euro, with all that that entails. The GDP of Germany will shrink this year. They have lost their markets in the South. The Us market is shrinking. They are going deeper and deeper into debt with every country that defaults. Greece is just the first. It won’t end until the Euro is history and the EU is only a few countries, at best. Wait and see.
Asklan on Mon, 19th Mar 2012 10:19 am
War is good for the us economy and jobs. Contrary to what the current president says oil imports are more necessary to the usa than bringing the troops home. Iraq took a matter of days to advance through initially. I wonder how long it would take Iran to fall? Asklan, India
Arthur on Mon, 19th Mar 2012 4:16 pm
Germany: 3.6% growth in 2010 and 3.0% in 2011 with almost zero population growth. That’s booming allright. We have to see what it will be in 2012, possibly somewhat lower.
Who cares about southern Europe or relatively unimportant US market if you have Russia, Ukraine and Asia and their unlimited demand for German products? Russia has cash in abundance to spend on German products thanks to high fossil fuel prices.
Germany is not so foolish to leave the euro or EU. They have massive export surplusses to the rest of Europe, so they are happy to compensate for free access to these markets. Germany is the big winner of the current crisis.
In the end the EU is going to include Russia. The North (Paris-berlin-Moscow) is going to replace the West. The coming Iranian crisis could hasten that proces, precisely as the Iraq adventure saw rebellion by France, Germany and Russia against the plans of Washington (‘cheese eating surrender monkees’, ‘freedom fries’).