Oil Markets Stay Calm Despite Political Unrest in Iran

By Steven Mufson
Washington Post Staff Writer
Friday, June 26, 2009

Over most of the past three years, the world trembled at the thought that a U.S. conflict with Iran might disrupt oil supplies. Oil traders and analysts have said that an "Iran premium" was probably adding anywhere from $2 to $15 a barrel to the price of crude oil.

But oil markets have remained calm over the past two weeks, even though Iran has been shaken by massive demonstrations and a power struggle among its most senior leaders. Though prices of crude oil and petroleum products such as gasoline have risen rapidly this year, traders and investors have shrugged off the possibility that the disputed Iranian elections might rock oil markets.

One reason, say oil experts, is that oil inventories are near record highs. Moreover, a combination of weak demand in recession-battered economies and rising production capacity in Saudi Arabia has created a cushion of excess production capacity. (Yesterday, crude oil prices climbed over $70 a barrel again because of new attacks on pipelines in Nigeria and new hopes for a U.S. economic recovery.)

"A couple of years ago, we would have been scared, at least for a few days," said Roger Diwan, an international oil analyst at PFC Energy, a Washington-based consulting firm. But, he added, "the world has 6 million barrels a day of spare capacity, and Iran exports only 2" million barrels a day.

In addition, if there were a political implosion in Iran, it might disrupt Iran's oil production. But an international conflict of the sort people feared the Bush administration might initiate over Iran's alleged nuclear weapons program probably would have engulfed the wider oil-rich region. Most of the oil exported by Saudi Arabia, Qatar, the United Arab Emirates, Kuwait and Iraq flows through the narrow Strait of Hormuz off Iran's shores.

"There is a great difference between the political and price impact of events that might bring about the closure of the Strait of Hormuz and thus threaten to bottle up most production in the Persian Gulf and that of those that could, at most, affect Iranian production," said Chas W. Freeman, veteran diplomat and former U.S. ambassador to Saudi Arabia.

"I think the market, like the Obama administration, has been appropriately calm and analytical rather than agitated or alarmist about what might happen as a result of the domestic Iranian unrest in the wake of its elections," Freeman added. "Events in Iran are disturbing on many levels, but there has been no reason to date to anticipate that they will have any short-term effect on oil supplies."

Financial markets have also been largely unaffected. "I'm in client meetings all day long, and in the past week nobody's asked me about Iran," said the chief global strategist of a leading U.S. bank.

In 1978, domestic unrest in Iran did have a major impact on the international oil market. In November that year, Iranian oil workers went on strike, bringing the country's 6 million barrels a day of production down to essentially zero, playing a key role in bringing about the fall of the shah, and driving up international prices. Gasoline prices shot up for U.S. consumers. After the Iranian revolution, many of Iran's skilled workers fled, and foreign oil experts left. Iran's oil production has never matched those pre-revolution levels; the country produces about 4 million barrels a day.

Now, however, the chances of an oil workers' strike seem remote, said Diwan, who added that the entrenched Iranian regime has coddled the oil workers. "The oil sector has really been pampered," he said. "These guys," he added, referring to Iran's conservative clergy, "were revolutionaries. They know how to do this -- and how to counter it, too."

The absence of a political premium for oil may give President Obama some flexibility in talking about Iran's elections. In the past, because of anxiety about oil supplies, many American foreign policymakers have argued that stability was more important than democracy in the Middle East. That trade-off might not apply to Iran's current power struggle.

"Iran is the only country in the Middle East in which if there's tumult and unrest, people think it could be for the better rather than the worse," said Karim Sadjadpour, a fellow at the Carnegie Endowment for International Peace, "as opposed to, say, the Gulf countries and elsewhere where the alternative to the status quo is something more radical, less modern and more anti-American."

On the other hand, it's not clear what the United States can do to influence the situation, others say.

"U.S. options are already so limited, and the arguments pro- and con-U.S. involvement, which are mostly con-, reflect a judgment about what would be politically constructive. And that's what determines what the U.S. is doing and, more importantly, not doing," said Richard Haass, president of the Council on Foreign Relations and author of "War of Necessity, War of Choice; A Memoir of Two Iraq Wars."

Some groups want to pressure Iran by blocking gasoline sales to the country, which because of refinery shortages imports a substantial amount of its gasoline even though it is a net exporter of oil. The Bush administration privately urged international oil companies such as India's Reliance to stop selling gasoline to Iran. But in the current market, oil refiners are looking for customers. And trading firms are happy to buy gasoline and resell it to Iran.

In addition, blocking gasoline sales to Iran could backfire, Diwan said. Moreover, he said, substantial quantities of gasoline are smuggled out of Iran -- where the subsidized price is about 20 cents a gallon -- to Afghanistan and Iraq, and the United States should be happy to have extra fuel supplies in those countries.

Many people argue that ultimately the United States would have the greatest impact on Iran's politics by reducing oil prices by cutting U.S. petroleum use. Sadjadpour said that Iran's foreign policy tends to be more confrontational when oil prices are high. "There is a direct correlation between the price of oil and Iran's foreign policy," he said. "Far more powerful than sanctions would be the contraction of oil prices."

© 2009 The Washington Post Company