Oil markets seem unfazed by the unrest in Iran, in the aftermath of that country's Presidential election. Mahmoud Ahmadinejad and Iran's Supreme Leader, the Ayatollah Khamenei, remain firmly in control, and there's no reason to expect that the ongoing demonstrations against perceived election fraud constitute a threat to Iranian oil exports. In that respect, the markets have it right. However, the conduct of the election--more than its outcome--may have altered the calculations of the nations determined to constrain Iran's nuclear ambitions, and may have inadvertently nudged Israel a step closer to acting on its own, should diplomatic efforts to halt nuclear enrichment remain stymied. But even a preemptive attack on Iran's nuclear complex might only result in a brief spike in oil prices, at least in the short run, because the fundamentals look so different than just a year ago.
The disappointment of the supporters of Mir Housein Mousavi and the other opposition candidates is palpable. We may never know whether they were cheated or merely out-polled, as some observers have suggested. If the latter view is correct, then the government was doubly inept in its handling of the situation, leaping to proclaim Mr. Ahmadinejad the resounding winner and cutting off access to the outside world, thus creating at least the strong appearance of a stolen election--a virtual coup, as some have called it. This appearance of illegitimacy, accurate or not, could haunt the government and strengthen the resolve of the "EU-3" countries leading the nuclear talks with Iran. It could also make Israel's new government even more determined that such a nation should never attain nuclear weapons, at any cost.
As described in an op-ed in the Wall St. Journal last week, air strikes by Israel on Iran's nuclear facilities could result in all sorts of adverse consequences, though this might still be seen as the least bad option should Iran remain adamant in pursuing its nuclear program. Iran's leaders proclaim their peaceful intent, an argument that resonates with the non-aligned nations and their sympathizers. However, nothing has changed the conclusion that I reached when I examined this subject in depth in 2005: the likeliest explanation for Iran's behavior and for the existence of its visible nuclear program in a country so blessed with other energy resources is that it intends to develop nuclear weapons. Even the risk of alienating Iran's moderates and uniting the country behind the hard-liners looks like less of a deterrent, if those moderates will never be allowed to win an election.
During most of the Bush administration, Iran's nuclear efforts were effectively shielded by its implicit threat to destabilize the global oil market. As I noted last fall, that was a trump card, until the global recession slashed demand, and oil inventories and spare production capacity began to accumulate. We shouldn't be fooled by the current price of oil, in this regard. It's where it is not because supply is physically constrained, as it was for much of 2007 and into 2008, but because OPEC's discipline is holding 3.25 million barrels per day off the market, according to a recent IEA assessment. That quantity is roughly 50% larger than Iran's exports. Saudi Arabia alone could cover any shortfall from Iran, particularly once its new Khurais field starts up. While many of OPEC's big producers are hardly models of democracy themselves, the perception of an illegitimate regime in Tehran would lend them significant political cover to open their taps, if the need arose.
Timing is everything, and Iran's oil weapon has been neutralized, for now; any threat of an embargo would ring hollow. The longer-term outlook is less certain. Once a global economic recovery is well under way, growing oil demand and the decline of mature fields in other producing regions will erode the current global oil capacity cushion and restore Iran's leverage. Time is now on Iran's side, and its adversaries are likely to understand that very well. Don't be surprised if the pressure on Iran ratchets up in the weeks and months ahead, before this window closes.
Post a Comment