Another Reason for Oil Prices to Rise

The International Energy Agency (IEA) claims three factors tend to cause significant shortages in oil production — technical problems, the weather and civil unrest. Unless the Iran oil embargo has been caused by some sort of change in the global political weather, there is another. The EU ban on Iranian oil started today, and Iran has gone so far as to admit that its economy already has been badly hurt. The United States has tightened the vice on Iran more with sanctions set against foreign companies that do business with Iran.

In a perverse sort of way, oil importers have been lucky recently. Global crude prices have fallen quickly because of slow demand from faltering world economies, a decision by OPEC to hold supplies as they are, and unexpected surpluses of crude stockpiles in some nations. The Iran embargo was supposed to push oil prices toward the record prices set in 2008. The fact that the prediction was wrong represents one reason the economies of the U.S., China, Japan, the United Kingdom and the European Union have not stumbled worse than they already have. If Brent traded above $120 or so for several months, some fragile national economies may have buckled into depressionlike periods.

As the Iran situation has reached a critical point, the IEA’s list of three reasons for shortages have largely been forgotten. They should not be. Nigeria and Venezuela are each among the 10 largest countries by proven oil reserves. Each has an unsteady political situation.

Weather has been overlooked as well, but hurricane season has started again. The National Oceanic and Atmospheric Administration predicts as many as 15 storms in the six-month season that began in June. Based on past experience, some of those could move far enough into the Gulf to interrupt drilling and refining.

A new price increase in oil that can be attributed to Iran, if there is one, will be fairly small. The one factor that could alter that soon is military tension between Israel and Iran over the latter’s weapon’s programs — the same weapons that triggered the ban initially.

So, the situation in Iran may not do much by itself to increase crude prices. But the traditional means of disruption are still present.

Douglas A. McIntyre