Protracted Iran Conflict Could Drive Oil Prices Up $60 Barrel

Author: Spencer Ogden
Date posted08/Mar/2012
Author: Spencer Ogden
Nobody’s announced a war, young lady,” President Barack Obama said in New York on March 2, wagging his finger at an audience member who decried the possibility of U.S. military action against Iran. “But we appreciate your sentiment.”

The crowd cheered, and a smile crossed the president’s face. It’s too soon to say when, or whether, the long-simmering dispute over Iran’s nuclear program will erupt in armed conflict, Bloomberg Businessweek reports in its March 12 issue.

“There is still a window that allows for a diplomatic resolution,” Obama said before meeting with Israeli Prime Minister Benjamin Netanyahu on March 5.

A raft of Western economic sanctions against Tehran, including a looming embargo on Iranian oil exports to the European Union, have made the country’s rulers more willing to“recommence negotiations without preconditions, which isn’t something they were amenable to last year,” according to Karim Sadjadpour, an Iran analyst at the Carnegie Endowment for International Peace. War with Iran in 2012 “is plausible but not probable,” he says.

The economic case against war is strong. Jitters about instability in the Middle East have caused the price of Brent crude to rise some 9 percent since the beginning of the year.

Insurance Premiums

Even a limited conflict with Iran -- the second-largest oil producer in the Organization of Petroleum Exporting Countries, after Saudi Arabia -- would jack up insurance premiums on oil tanker traffic through the Persian Gulf.

Iran exports 2.5 million barrels per day, and OPEC lacks the spare capacity to make up for the likely loss of Iranian supply in the event of an attack, according to Robert McNally, president of the Rapidan Group, an energy consulting firm. That’s a formula for an oil shock far more painful than what global consumers are currently experiencing.

“What we see now is a market that is very fearful and very tight,” says McNally, a former senior director for international energy at the National Security Council. “In those conditions, it doesn’t take much to send the cost of oil soaring.”

Just how high prices might climb if war breaks out, and the broader consequences to the world economy, depend on two factors: whether military action is initiated by Israel or by the U.S., and how Iran responds.

Four Facilities

A strike conducted by Israel, which has limited air power, might be over in a matter of hours. It would target the four main Iranian nuclear facilities the world knows about, but there’s no guarantee that Israel’s bombs would be able to penetrate Iran’s deepest underground sites.

An attack carried out by the U.S. military, on the other hand, would be longer and more extensive, according to Matthew Kroenig, a nuclear security expert at the Council on ForeignRelations. He says a two-week U.S. bombing campaign could wipe out not just Iran’s nuclear program but also its air defenses and some missile capabilities.

The Pentagon’s newest generation of 30,000-pound “bunker-buster” bombs are thought to be capable of pulverizing targets as much as 200 feet below ground.

“There’s a lot of confusion between what an Israeli strike would do and what an American strike could do,” Kroenig says.“Israel would set Iran’s nuclear program back between one and three years. The U.S. can set it back 10 years.”