Iran’s Political Unrest and Oil Prices

Iranian supporters of defeated reformist presidential candidate, Mir Hossein Mousavi, carry his image as they demonstrate in the streets on June 15th in Tehran. (image: Getty images via businessweek.com)

Reuters reported this week that the election protests in Iran, the world’s fifth biggest oil exporter, have so far had little impact on global supply or prices. Markets would likely react, however, said the report, if unrest escalated and spread to the oilfields or export terminals in the country’s south, where most of the oil is produced and shipped. The US gets no direct oil shipments from Iran, as U.S. refiners are banned from processing Iranian oil due to sanctions. Most of Iran’s 2 million barrel per day output oil goes to Japan and China, with Europe taking the rest. Even so, the Reuters report speculates that the US would likely feel the effect of any price spike caused by disruption.

What’s the likelihood that disruptive unrest could escalate? The AP reported that Iran’s supreme leader Ayatollah Ali Khamenei said Friday that the country’s disputed June 12th presidential vote had not been rigged as charged by the opposition. Khamenei sternly warned protesters of a crackdown if they continue demonstrations demanding a new election.

Supporters of the defeated opposition candidate Mir Hossein Mousavi are now faced with the choice of dropping their demands for a new vote or taking to the streets again.

Iran's supreme leader Ayatollah Ali Khamenei (image: d.yimg.com)

An interruption in the flow of oil from Iran would likely be cushioned by a response from other oil producing nations. OPEC producers with spare capacity would likely increase output. The current global recession has cut demand and OPEC members have reduced supplies, leading to a build up in spare capacity. Saudi Arabia, the world’s top oil exporter, has around 4.5 million barrels per day of spare production capacity.

Refiners would also use oil in inventories which are at or near capacity. The oil sector is in a more comfortable position to deal with an outage now than it has been for years. This wasn’t the case in 1978, when strikes leading up to the Iranian revolution stopped the flow of oil – about 6 million barrels per day at the time. That disruption was keenly felt by the United States, which had to ration fuel. The shortfall ruptured global supply lines, sparked panic-buying and saw a sharp rise in oil prices that contributed to the U.S. recessions of 1980 and 1981.

BusinessWeek reported on June 16th that whether or not oil exports are actually disrupted, the current turmoil will surely be bad for Iran’s economy, and a prolonged downturn seems likely.

After years of strong growth fueled by high energy prices and government spending, Iran was already heading for a slump this year partly because of lower oil prices. Iran’s oil industry, the report said, badly needs foreign know-how to develop gas reserves and offset declines at aging oil fields. But Royal Dutch Shell, Total, and others with years of experience in Iran are reluctant to go ahead with long-pending projects while Tehran is at loggerheads with Washington.