Record Oil Prices, Rising Tensions with Iran Top “Worry” Lists for 2012

OPEC reported that 2011 was a record-shattering year for oil prices, which averaged $107 a barrel, about 14 percent more than in the previous record year of 2008. The Washington Post, which carried the report in its Sunday’s edition, also quotes a leading investment strategist as saying that the rising oil prices and growing tensions with Iran are now on top of economists’ and policymakers’ worry lists for 2012.



“It’s been in the background for quite some time,” said Edward Yardeni, the investment strategist. “I’ve characterized it as one of the four horsemen of the apocalypse for 2012. Now it’s come from behind to be at the head of the pack,” he added [Washington Post, 15 January].

With new US and European sanctions expected to gradually reduce the export of Iranian oil in the next six months, the price of oil can go even higher, hurting the fragile global economy, especially Europe’s. Three of Europe’s most troubled economies — Greece, Spain and Italy — are also the E.U.’s biggest importers of Iranian crude and would be most affected by a new ban.

“At current prices, the world economy is going to grow at 3 percent to 3.5 percent this year,” said Adam Sieminski, chief energy economist at Deutsche Bank. “That’s not great, but okay. At $125 a barrel, it is only going to grow 2.5 percent, and that’s not very good. And at $150, we might only grow 1 percent, and that’s a disaster.” [Washington Post, 15 January].

In the next six months, the UAE will open a new overland pipeline bypassing the Strait of Hormuz, and the Libyan output would likely return to pre-conflict levels. Hence the EU is delaying and phasing out the ban on Iranian oil imports for the next six months to give European refiners who buy some 600,000 barrels of Iranian oil daily to source new supplies.

Iran’s greatest hope for rerouting its exports would be to sell more to its biggest customer, China, which imported about 550,000 barrels a day last year, the Post reports. But a contract dispute has led to a temporary decline in Iranian sales to China. And, as the Post observes, it isn’t clear how much China wants to rely on one source of oil or how much China can add to its strategic stockpiles.



The six-month delay in EU’s ban of Iran oil imports would also give Iran and the major Western powers yet another chance to resolve the issues over Iran’s nuclear program through talks. Avoiding a military conflict over the Iranian program will be key to secure stable oil prices in 2012, and indeed avoiding the disaster stated by Deutsche Bank’s Sieminski.