Friday, September 10, 2010

Iran: Using Oil as a Weapon

Timeline: Iran’s Impact on Oil Prices

Iran’s ongoing nuclear program, opposed by almost all of the international community, has contributed significantly to higher oil prices[1] by creating numerous fears among those in the oil industry. Oil traders, for example, are concerned that Iran’s nuclear ambitions will lead to a war that will interrupt the supply of Middle Eastern oil. An even greater fear is that Iran would pursue a war strategy of attacking non-Iranian vessels in the Straits of Hormuz to disrupt the shipment of oil from other Gulf countries.

Forty percent of the world’s internationally traded oil travels through the Straits of Hormuz in the Persian Gulf.
[2] Traders ask for higher prices to hedge against the possibility of a disruption in the oil supply. This “risk premium” does not account for future price changes should a disruption in the supply of oil actually occur; rather, it reflects the probability that oil may increase in value in the near future. If Iran were unable to export its usual production of oil due to war, this too would raise prices.
Current policies of the Iranian government not related to nuclear energy have also helped keep the price of oil high. The Iranian government’s opposition to any increase in the oil production of nations belonging to the Organization of Petroleum Exporting Countries (OPEC) has raised prices by limiting the supply of available oil from OPEC nations.[3]

Iran has attempted to use its oil wealth to undermine the value of the U.S. dollar by discouraging the use of the dollar for foreign oil company payments,[4] even though the dollar is the traditional currency used for oil deals. According to the National Iranian Oil Company, 85 percent of Iranian oil is purchased using euros or yen.[5] Despite this effort, the effect on the value of the U.S. dollar remains minimal.[6]

Oil as a Weapon in Wartime

Mohammad Ali Jafari, commander of Iran’s Revolutionary Guards, stated in a June 2008 interview that in case of war, Iran would seek to establish military control over the Straits of Hormuz and the transportation of oil from the region.[7] "If there is a confrontation between us and the enemy from outside the region,” Jafari said, “definitely the scope [of the confrontation] will reach the oil issue."[8]

Iran pursued a similar military strategy during the phase of the Iran-Iraq War between 1981 and 1987 that was dubbed the ‘Tanker War’[9] when Iraq and Iran attacked oil tankers belonging to each other; Iran also attacked tankers belonging to any country supporting Iraq.[10] As a result, shipping in the Gulf region dropped 25 percent during this period.[11] The effect the war had on oil prices is hard to quantify. The price of oil reached a peak in 1982 before the attacks on shipping became wide-scale and the price declined thereafter.[12] Moreover, the effect may be different if war were to occur now because of changes in the oil market since the 1980s.[13] With today’s rising oil price, disruption in Persian Gulf shipping could lead to a further significant price increase.

Regional instability caused by Iran-backed terror groups is another problem. Such groups may participate in any Iranian response to an attack.[14] The July 2006 war between Israel and the Iran-backed terror group Hezbollah caused the world price of oil to rise. [15]

Iranian-sponsored terror groups include Lebanese-based Hezbollah, Hamas, Palestinian Islamic Jihad (PIJ), the Democratic Front for the Liberation of Palestine (DFLP), the Syrian-offshoot Palestinian Fatah al-Intifada and the Popular Front for the Liberation of Palestine General Command (PFLP-GC). [16] Iran provides these terrorist organizations money, training, and arms.[17] Jafari, the commander of Iran’s Revolutionary Guards, has specifically stated that Hezbollah may participate in an Iranian-orchestrated counter-response to an attack on Iran’s nuclear installations.[18]

Iran’s geostrategic location and role as world oil supplier puts it in a strong position to influence oil prices, as demonstrated by the fact that:

* It is estimated that the cumulative effect of Iran’s destabilizing activities in the Middle East have led to a $10 to $15 per barrel increase in the price of oil;[19]
* Iran is the second largest oil producer in OPEC.[20] Iran exports 2.6 million barrels of oil per day;[21]
* 20 percent of the world’s oil and 40 percent of the world’s internationally traded oil travels through the Straits of Hormuz in the Persian Gulf;[22]
* The Straits of Hormuz are 34 miles (21 kilometers) wide at their narrowest point.[23] At this section there are two mile-wide channels (one in each direction) for tanker traffic and a two mile-wide buffer zone, making the straits extremely vulnerable to blockade.[24]

Iran’s Effect on Natural Gas Prices

* Iran has the second largest proven natural gas reserves in the world after Russia, with an estimated 974 trillion cubic feet of proven reserves.[25]
* 62 percent of Iran’s natural gas fields are undeveloped.[26]

There have been rumors in the natural gas industry that Iran is part of an attempt to create a natural gas cartel similar to OPEC.[27] The suggested members of a future cartel are the countries currently participating in the Gas Exporting Countries Forum, a technical assistance and cooperation organization formed in Iran that includes Russia, Iran, Qatar, Algeria and Kazakhstan.[28] Its first meeting was held in Tehran in May 2001.[29] See below for a timeline detailing Iran’s effect on world oil prices during the last several months.

Timeline: Iran’s Impact on Oil Prices

July 11, 2008: Oil jumps $5 to $147 a barrel due to concerns about oil supplies from Iran, Nigeria, and Brazil.[30]

July 9, 2008: Oil rises by $1 after Iran test-fires nine medium range missiles.[31]

July 4, 2008: Oil drops by $1 after Iran says it will respond to a proposal made by the five permanent Security Council members and Germany regarding its nuclear program.[32]

July 1, 2008: Oil prices increase after an International Atomic Energy Agency (IAEA) report is released and tensions between Israel and Iran increase.[33]

June 30, 2008: Oil rises $3 to $143 a barrel after Iran threatens to blockade the Straits of Hormuz if attacked.[34]

June 25, 2008: Price of oil dips below $138 a barrel after Iranian official denies rumors that an attack on its nuclear facilities has occurred.[35]

May 16, 2008: Oil reaches $127 after Iranian President Mahmoud Ahmadinejad announces that Tehran is studying a plan to reduce oil output.[36]

Feb. 24, 2008: U.S. crude oil prices hit a record high of $101.32 after Iranian Oil Minister Gholamhossein Nozari rejects Western entreaties for an increase in oil production.[37]

Nov. 19, 2007: Venezuela and Iran advocate raising the price of oil and divesting from the U.S. dollar at an OPEC meeting. President Hugo Chavez of Venezuela, backed by Iran, tells OPEC to become an "active political agent" and threatens that oil would reach $200 if the U.S. attacked Iran.[38]

Oct. 26, 2007: Oil prices close at a record $90.46 a barrel as the U.S. imposes sanctions on Iran for its support of terrorism and issues warnings about its nuclear program.[39]

July 31, 2007: Oil prices increase as the Iranian press reports that the Islamic Republic does not support higher oil production.[40]

May 29, 2007: Oil prices fall by $2 to $63.15, due in part to talks between the U.S. and Iran. [41]

Apr. 04, 2007: The price of oil falls $1.30 to $64.64 after President Ahmadinejad agrees to release 15 British nationals detained two weeks earlier.[42]

Feb 19, 2007: The U.S. sends a second aircraft carrier to the Persian Gulf and threatens to kill or arrest Iranians working with insurgents in Iraq. Fear of a future conflict with Iran increases the oil price and “risk premium.”[43]

Sep. 19, 2006: Oil prices in Asia pass the $64 mark with apprehension in the commodities market. Oil traders are worried about Iranian threats to cease inspections of its nuclear facilities.[44]

Apr. 11, 2006: Disruptions in the oil supply from Nigeria, and speculation over a U.S.-Iran military conflict elevate oil prices. [45]

Jan. 29, 2006: Oil prices climb as the international community clashes with Iran over its nuclear ambitions. President Ahmadinejad threatens production cuts if punitive measures are taken against Iran. Fears of Iran’s potential reaction add $10 risk premium to oil prices.[46]

Dec. 29, 2005: Oil prices rise in response to a comment by the Iranian deputy oil minister? that OPEC should cut output in the following month.[47]

Aug. 02, 2005: Oil futures and the price of crude oil reach new highs after Iran threatens to restart its nuclear activities.[48]

June 28, 2005: Oil prices rise 70 cents to $60.54, an increase of more than 1 percent, following the election of Iranian President Mahmoud Ahmadinejad.[49]

Mar. 15, 2005: Iran disagrees with a Saudi Arabian plan to increase oil production in order to ease prices. Instead, an Iranian official states that high prices are “not in our hands.”[50]

Feb. 15, 2005: Oil prices briefly rise more than $1 following conflicting reports of an explosion, later revealed to have been innocuous, near a nuclear power plant in southern Iran.[51]

Jan. 30, 2005: Iran announces OPEC’s decision to raise the target oil price. The Iranian oil minister states that political factors, such as perceived U.S. threats over Iran’s nuclear program, caused the price rise. “Any threat or ballyhoo can lead to price increases,” says the minister.[52]

June 4, 2004: The Iranian oil minister says that the American “occupying force” in the Middle East contributes to the rise in oil prices.[53]
Nov. 15, 2004: Oil prices reach their lowest levels in almost two months after Iran, in talks with Britain, France and Germany, agrees to suspend its uranium enrichment and reprocessing activities.[54]

Footnotes:

[1] “Main risks to crude oil supply lie in Iran, Nigeria, Gulf of Mexico,” AFX Asia, June 21, 2007; “Wall Street outlook lower on rising oil prices, Microsoft patent ruling,” AFX Asia, Feb. 23, 2007; Surowiecki, James, “Troubled waters over oil,” The New Yorker, Feb. 19, 2007, retrieved on July 27, 2008 from http://www.newyorker.com/talk/financial/2007/02/19/070219ta_talk_surowiecki; Herbst, Moira, “Oil, Guns, and Iran,” Business Week, March 29, 2007, retrieved on July 27, 2008 from http://www.businessweek.com/bwdaily/dnflash/content/mar2007/db20070328_663022.htm

[2] Hargreaves, Steve, “Sizing up Iran’s oil threat,” CNNmoney.com, July 10, 2008 retrieved July 13, 2008 from http://money.cnn.com/2008/07/10/news/international/iran_oil/index.htm?section=money_topstories; Webb, Claire, “Record oil prices: Iran and the Strait of Hormuz,” Times Online (UK), July 3, 2008, http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4262388.ece

[3] “Iran says OPEC will not be pressured by oil consumers,” AFX Asia, Sep. 19, 2007.

[4] Schreck, Adam, “Under pressure from the U.S., Iran seeks to reduce its dollar intake,” The Associated Press, Oct. 11, 2007.

[5] Ibid.

[6] Ibid.

[7] “Iran to control Gulf oil route if attacked,” gulfnews.com, June 28, 2008, retrieved July 27, 2008 from http://archive.gulfnews.com/articles/08/06/28/10224437.html

[8] Ibid.

[9] Cohen, Ariel, James Phillips and William Schirano, “Countering Iran’s oil weapon,” The Heritage Foundation, Nov. 13, 2006 retrieved July 27, 2008 from http://www.heritage.org/Research/Iran/bg1982.cfm#_ftn5

[10] Sciolino, Elaine, “From air and sea, Iran-Iraq ‘tanker war’ heats up,” The New York Times, Sep. 3, 1987, retrieved on July 27, 2008 from http://query.nytimes.com/gst/fullpage.html?res=9B0DE3DA123BF930A3575AC0A961948260&sec=&spon=&pagewanted=1

[11] Webb, Claire, “Record oil prices: Iran and the Strait of Hormuz,” The Times Online (UK), July 3, 2008, retrieved on July 27, 2008 from http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4262388.ece

[12] “Iran-Iraq war (1980-1988),” globalsecurity.org, retrieved July 27, 2008 from http://www.globalsecurity.org/military/world/war/iran-iraq.htm

[13] Cohen, Ariel, James Phillips and William Schirano, “Countering Iran’s oil weapon,” The Heritage Foundation, Nov. 13, 2006 retrieved July 27, 2008 from http://www.heritage.org/Research/Iran/bg1982.cfm#_ftn5

[14] Engelhardt, Tom, “Why the US won’t attack Iran,” The Asia Times, July 11, 2008, retrieved July 27, 2008 from http://www.atimes.com/atimes/Middle_East/JG11Ak04.html

[15] “Israel assault on Lebanon and Gaza continues,” CBC News, July 14, 2006, retrieved July 27, 2008 from http://www.cbc.ca/story/world/national/2006/07/13/israel-lebanon.html; Fattah, Hassan M. and Steven Erlanger, “Israel blockades Lebanon; wide strikes by Hezbollah,” The New York Times, July 14, 2006, http://www.nytimes.com/2006/07/14/world/middleeast/14mideast.html?pagewanted=print

[16] O’Brian, James M., “Exporting Jihad: Iran’s Use of Non-State Armed Groups,” The Fletcher School of Law and Diplomacy and The Jebsen Center for Counter-Terrorism Studies, March 22, 2006. Paper presented at the 47th Annual International Studies Association

[17] “Country Reports on Terrorism 2007,” United States Department of State Publication, April 2008, retrieved July 27, 2008 from http://www.state.gov/documents/organization/105904.pdf, 172

[18] “Iran to control Gulf oil route if attacked,” gulfnews.com, June 28, 2008, retrieved July 27, 2008 from http://archive.gulfnews.com/articles/08/06/28/10224437.html

[19] Surowiecki, James, “Troubled waters over oil,” The New Yorker, Feb. 19, 2007, Retrieved on July 27, 2008 from http://www.newyorker.com/talk/financial/2007/02/19/070219ta_talk_surowiecki; Herbst, Moira, “Oil, Guns, and Iran,” Business Week, March 29, 2007, retrieved on July 27, 2008 from http://www.businessweek.com/bwdaily/dnflash/content/mar2007/db20070328_663022.htm

[20] “Iran: OPEC almost unable to cool oil prices,” Fars News Agency, July 2, 2008, retrieved on July 27, 2008 from http://english.farsnews.com/newstext.php?nn=8704121303

[21] Henderson, Simon, “Facing Iran’s Challenge: Safeguarding Oil Exports from the Persian Gulf,” The Washington Institute for Near East Policy, June 7, 2006, retrieved on July 27, 2008 from http://www.washingtoninstitute.org/templateC05.php?CID=2477

[22] Hargreaves, Steve, “Sizing up Iran’s oil threat,” CNNmoney.com, July 10, 2008 retrieved July 13, 2008 from http://money.cnn.com/2008/07/10/news/international/iran_oil/index.htm?section=money_topstories; Webb, Claire, “Record oil prices: Iran and the Strait of Hormuz,” Times Online (UK), July 3, 2008, http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4262388.ece

[23] “U.S. sub, Japanese merchant ship collide,” AP, January 8, 2007, retrieved on July 27, 2008 from http://www.msnbc.msn.com/id/16533096/

[24] Ibid.

[25] “Iran: natural gas,” Energy Information Administration website. Retrieved July 27, 2008 from http://www.eia.doe.gov/emeu/cabs/Iran/NaturalGas.html

[26] Ibid.

[27] “Russia and other energy exporters are forming a gas cartel,” APS Review Gas Market Trends, Nov. 20, 2006.

[28] Ibid.

[29] Ibid.

[30] “Oil price rises after Iran fears,” Reuters, retrieved July, 27, 2008 from http://archive.gulfnews.com/articles/08/06/25/10223594.html

[31] “Oil rise following Iran missile test,” Bloomberg, July 9, 2008.

[32] “Oil sheds over $1 to drop below $145,” Reuters, July 4, 2008.

[33] “Oil rises after slipping from earlier record,” gulfnews.com, July 1, 2008, retrieved July 27, 2008 from http://archive.gulfnews.com/articles/08/07/01/10225173.html

[34] “Oil hit new record at $143 sparked by Mideast tensions,” gulfnews.com, June 30, 2008, http://archive.gulfnews.com/articles/08/06/30/10224947.html

[35] “Oil dips below $138 after rising on Iran attack rumor,” gulfnews.com, June 25, 2008, retrieved July 27, 2008 from http://archive.gulfnews.com/articles/08/06/25/10223594.html

[36] “Money behind Iran’s move to review production level,” Reuters, May 16, 2008.

[37] Thomas, Nathalie, “No respite over crude as Iran vows to support OPEC oil cut,” The Scotland, Feb. 24, 2008

[38] Dan Murphy, Christian Science Monitor, "OPEC's lost sway over oil prices," Nov. 19, 2007, retrieved July 27, 2008 from http://www.csmonitor.com/2007/1119/p01s01-wogn.htm

[39] Mufson, Steven, “Strike on Iran Would Roil Oil Markets, Experts Say,” The Washington Post, Oct. 26, 2007, retrieved July 27, 2008 from http://www.washingtonpost.com/wp-dyn/content/article/2007/10/25/AR2007102502840_pf.html

[40] “Oil up on expectations EIA will report further crude draw, OPEC comments UPDATE,” Forbes, July 31, 2007, retrieved July 27, 2008 from http://www.forbes.com/markets/feeds/afx/2007/07/31/afx3969610.html

[41] "Oil Prices fall more than $2 a barrel after Nigeria president inaugurated, Iran-U.S. talks," International Herald Tribune, May 29, 2007, retrieved July 27, 2008 from http://www.iht.com/articles/ap/2007/05/29/business/NA-FIN-MKT-Oil-Prices.php

[42] Schneiderman, R.M., “Oil Prices Expected To Remain High,” Forbes, Apr. 04, 2007, retrieved July 27, 2008 from http://www.forbes.com/markets/2007/04/04/oil-iran-greatbritain-markets-equity-cx_rs_0404markets15.html

[43] Surowiecki, James, “Troubled Waters Over Oil,” New Yorker, Feb. 19, 2007, retrieved July 27, 2008 from http://www.newyorker.com/talk/financial/2007/02/19/070219ta_talk_surowiecki

[44] Lumpur, Kuala, “Crude prices rise, pass US$64 mark on renewed Iran jitters; delays in BP platform startup,” The International Herald Tribune, Sep. 19, 2006, http://www.iht.com/articles/ap/2006/09/19/business/AS_FIN_MKT_Oil_Prices.php

[45] Kollewe, Julia, “Fears of US conflict with Iran send oil prices to record highs,” The Independent, Apr. 11, 2006,

[46] Stewart, Heather, “Iran crisis 'could drive oil over $90'”, The Guardian, Jan. 29, 2006, retrieved July 27, 2008 from http://www.guardian.co.uk/business/2006/jan/29/iran.oilandpetrol

[47] Xydias, Alexis, “European stock indexes fall as oil climbs,” The International Herald Tribune,” Dec. 29, 2005, retrieved July 27, 2008 from http://www.iht.com/articles/2005/12/28/news/bxstox.php

[48] Peltz, James F., “Oil Futures Set Record; Gas Soars; The death of King Fahd contributes to supply fears, pushing crude to a new high of $61.57,” The Los Angeles Times, Aug. 02, 2005, retrieved July 27, 2008 from http://articles.latimes.com/2005/aug/02/business/fi-oil2

[49] Mouawad, Jad, “Oil Settles Over $60 a Barrel as Iran News Rattles Market,” The New York Times, June 28, 2005, retrieved July 27, 2008 from http://query.nytimes.com/gst/fullpage.html?res=9500E7D71631F93BA15755C0A9639C8B63

[50] Mouawad, Jad, “For OPEC, Iran talks are a first in 34 years,” The International Herald Tribune, Mar. 15, 2005, http://www.iht.com/articles/2005/03/14/business/opec.php?page=2

[51] “Iran and Syria sign defense pact to face mutual ‘threat,’” The Guardian, Feb. 18, 2005, in Taipei Times, retrieved July 27, 2008 from http://www.taipeitimes.com/News/front/archives/2005/02/18/2003223489/print

[52] “OPEC agrees to suspend oil price band,” Jan. 30, 2005, Iranian.ws, http://www.iranian.ws/cgi-bin/iran_news/exec/view.cgi/12/5518

[53] “Iran’s oil minister says political crisis contributes to rising oil prices,” BBC Monitoring International Reports, June 4, 2004

[54] Sciolino, Elaine, “Europeans Say Iran Agrees to Freeze Uranium Enrichment,” The New York Times, Nov. 16, 2004, retrieved July 27, 2008 from www.nytimes.com/2004/11/16/international/middleeast/16iran.html

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