February 13, 2007


TROUBLED WATERS OVER OIL (James Surowiecki, 2007-02-19, The New Yorker)

In the current confrontation between the U.S. and Iran, these same concerns create a perverse set of incentives: whenever the U.S. says things that make a military conflict with Iran seem more likely, the price of oil rises, strengthening Iran's regime rather than weakening it. The more we talk about curbing Iranian power, the more difficult it gets.

It's hard to measure the risk premium exactly, but most estimates suggest that in the past couple of years, thanks largely to the turmoil in the Middle East, it has accounted for somewhere between ten and twenty dollars on each barrel of oil. (Last year, Qatar's oil minister said, "If you can stop the politicians from making negative statements, I am sure you will see almost fifteen dollars disappear from the price.") And, because Iran has the world's second-largest reserves and pumps so much oil, trouble with Tehran sends the premium soaring. Ten months ago, for instance, when Iranian leaders were talking about their progress in enriching uranium, and were threatening to attack Israel in response to any U.S. attack, the price of oil rose to more than seventy-five dollars a barrel. The economic consequences of this are not trivial; in the past few years, the inflated risk premium has given Iran tens of billions of dollars that it would otherwise not have had.

This helps Ahmadinejad enormously, because Iran has made huge commitments to government spending that can be kept only by relying on oil revenue. Last year, Iran spent more than forty billion dollars on things like subsidies for gasoline, bread, and heating fuel, and to keep money-losing enterprises in business. High oil prices also help protect Iran against the woeful state of its oil infrastructure. Getting a barrel of oil out of the ground can cost Iran three or four times what it costs Saudi Arabia, and a recent paper by Roger Stern, an economic geographer at Johns Hopkins University, argues that Iran's lack of investment in its oil fields has reached a point where the country may be unable to export oil within the decade. Iran, in short, may well be running itself into the ground. But higher oil prices defer the day of reckoning.

The persistence of the risk premium means that Ahmadinejad, whatever his religious or nationalist inspiration, has an economic incentive to say confrontational things that spook the oil market. But the effect of his pronouncements is limited, because traders know that self-interest is likely to keep Iran from doing anything that would cut off the supply of oil. What really keeps the risk premium high is the American penchant for public responses to Iran's provocations. So cooling down the martial rhetoric--even if we plan to take military action eventually--would likely bring oil prices down for a time, making Iran weaker.

Public meetings between American officials and guys like Larijani and Rafsanjani then would serve not only to obviously undercut Ahmedinejad but to deprive him of the premium.

US's smoking gun on Iran misfires (Gareth Porter, 2/14/07, Asia Times)

The first major effort by the administration of US President George W Bush to substantiate its case that the Iranian government has been providing weapons to Iraqi Shi'ites who oppose the occupation undermines the administration's political line by showing that it has been unable to find any real evidence of an Iranian government role.

On the other hand, their nuclear program is a joke too.

Posted by Orrin Judd at February 13, 2007 9:15 PM

Just another reason why the Strategic Petroleum Reserve is only useful as a way to strategically manipulate price.

The idea that it is there for emergencies is ridiculous.

Posted by: Bruno at February 14, 2007 7:25 AM

Gareth Porter must have missed the news - the 100+ Steyr-Mannlicher sniper rifles found in Iraq represent about 15% of the total sold to the Iranian National Police over a year ago. They are traceable, right down to the serial numbers.

And many Americans have been killed with these weapons. Like I said yesterday, an American soldier gets shot, kill a mullah in Iran. Tit for tat.

Posted by: ratbert at February 14, 2007 9:56 AM