Iran’s standoff with West over nuclear project could upset economic recovery

If not carefully handled, the stand-off between Iran and the West over the former’s nuclear programme could lead to a major fuel supply crisis with potential for causing high prices that could interfere with global economic recovery.

All parties should weigh the consequences of a flare up that could disrupt the flow of oil from Persian Gulf exporters. Further, the latest US law on Iranian boycott is likely to have a downside impact on global oil trade and supply.

The law cuts off US financial systems from foreign firms that do business with the Iran Central Bank.

With the ongoing geopolitical stalemate in the Middle East, speculation is already driving oil prices above $110 per barrel, after prices dipped in November and December last year.

A war involving Iran and the West would create a supply and demand imbalance that would send oil prices on an upward trajectory that might exceed prices experienced in 2008.

This would be the wrong time as the world (Kenya included) is currently engaged in economic recovery programmes.

Iran oil production stands at about 4.2 million barrels per day (mbpd) compared with a total world output of about 82.1 mbpd.
The country exports about 2.5 mbpd of oil to the EU and Asian countries.

About 20 per cent of global oil exports pass from the Persian Gulf oil producers through the narrow Strait of Hormuz which lies between Iran and Oman.

Iran has in the past few weeks engaged in military maneuvres in the strait. Any hydrocarbon barrels removed from global supply, either by an act of war in the Persian Gulf or through Iranian economic sanctions, will have to be made up from somewhere to avoid a global supply and price problem.

Saudi Arabia, which has hitherto come to the rescue with increased production, is already at maximum production, approaching 10 mbpd.

Libya is just about 60 per cent through oil production recovery to its pre-war 1.6 mbpd levels; Iraq is already showing signs of political instability after America’s withdrawal and the anticipated production increases may be delayed; smaller oil producers Syria and Sudan are going through political instability.

Whereas the larger economies may have the capacity and flexibility to switch oil supply away from the precarious Persian Gulf, vulnerable countries like Kenya will have limited options, and whichever options they line up are likely to be more expensive.

It is not the first time that a conflict between Iran and the West has disrupted global economies.

In 1979 a series of events in Iran resulted in a major oil supply crisis that resulted in a prolonged global economic recession. The Iranian revolution in 1979 sent the Shah packing; this was followed by taking of American hostages by Iranians; then USA decreed economic sanctions on Iran (which are still in effect to this day). In 1980 the lengthy war between Iran and Iraq broke out, further disrupting oil supplies.

Due to Iranian related disruptions, the period 1979 to 1982 experienced very high oil prices which reached $39 per barrel. This level of prices was only reached in the 2008 oil price explosion.