Tuesday, August 05, 2008

Ebneyousef--Attacking Iran: Probable Economic Consequences (Middle East Economic Survey)

Middle East Economic Survey


No 31


Comment by William O. Beeman

Elements of the Bush administration evidently think that attacking Iran would be cost-free, as they did with Iraq. Hosseein Ebneyousef, an oil expert tells the sobering truth.

Bill Beeman
University of Minnesota


Attacking Iran: Probable Economic Consequences

By Hossein Ebneyousef

The following article was written for MEES by Mr Ebneyousef. Since 1988 he has been the President of Washington-based International Petroleum Enterprises, having previously worked for ARCO for 14 years (e-mail Ebneyousef@AOL.com).

Considering the already overstretched US military assets, its engagement in two major and costly theaters of war in Iraq and Afghanistan, deteriorating security conditions in Pakistan and Lebanon and Iran’s apparently softer approach on the nuclear issue, I am not sure that a military attack on Iran is imminent (that is, if one attributes a minimal level of rationality to the decision makers). Even an effective military blockade of Iran, which is an act of war in any case, does not seem feasible in light of Iran’s size, strategic location and lengthy maritime and land borders. Here, I would like to address the global economic impact of such potential actions, as it would likely be much more drastic and long lasting than has so far been explained.

Despite the existence at the time of more than 4.4mn b/d of spare oil production capacity worldwide, the limited nature of the reduction in the total oil output of the exporting countries, and the short duration of the implemented policy, the 1973 Arab oil embargo was a turning point for the oil and natural gas business. Oil prices never retreated to the pre-crisis level but kept going up by more than 400% into the next energy shock, which took place six years later. Notably, global oil output during the same time frame increased by more than 22% – even the Gulf producers raised their output by more than 20%. Therefore, it is reasonable to expect substantially higher oil prices for a longer period of time as a result of introducing any additional threat of a military attack.

Inflicting damages to oil facilities – intentionally or otherwise – can and will reduce production capacity. With today’s high cost of materials and services and severe manpower shortage, repairs would prove to be highly costly and time consuming. A similar but more manageable condition existed during the Iran-Iraq War and the subsequent reconstruction era in both countries. Thus, actual military operations have the potential to raise oil prices even further and for yet longer periods of time. The same is also true for post-natural disaster recoveries. For instance, the 2005 hurricane damage in the US Gulf coast is not yet fully repaired three years later, and its impact is still reflected in the current production figures.

Military conflicts have the tendency of spreading beyond their intended scopes, and could be devastating particularly in a region that houses close to two-thirds of the global oil reserves, with the probability of driving oil prices to even higher levels for a longer time interval and causing more ‘collateral damage’.

Unlike in the 1970s or the 1980s:

The industry now has very little spare oil production capacity left anywhere in the world;

Resource nationalism is on the rise;

Economic sanctions have eliminated up to 5mn b/d of oil production capacity from the market;

Strategic stocks have grown at a lower rate relative to the growth of global oil consumption; and

There are higher oil prices and high uncertainty over future prices, forcing refiners to minimize the size of their commercial stocks.

In short, at present the oil industry’s support systems are very limited and incapable of modifying the current and future risks. Therefore, I hope authorities realize the seriousness of the issue at hand and the potential disastrous consequences of making a wrong move at this crucial juncture. Runaway oil prices have the potential to force the Western economies, particularly that of the US which is already weakened by the housing crises and the declining dollar value, into a collapse.

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