Strike on Iran Would Roil Oil Markets, Experts Say

Strike on Iran Would Roil Oil Markets, Experts Say
Price Hits Record Close; U.S. Tightens Sanctions

By Steven Mufson
Washington Post Staff Writer
Friday, October 26, 2007; A01

A U.S. military strike against Iran would have dire consequences in petroleum markets, say a variety of oil industry experts, many of whom think the prospect of pandemonium in those markets makes U.S. military action unlikely despite escalating economic sanctions imposed by the Bush administration.

The small amount of excess oil production capacity worldwide would provide an insufficient cushion if armed conflict disrupted supplies, oil experts say, and petroleum prices would skyrocket. Moreover, a wounded or angry Iran could easily retaliate against oil facilities from southern Iraq to the Strait of Hormuz.

Oil prices closed at a record $90.46 a barrel in New York yesterday as the Bush administration tightened U.S. financial sanctions on Iran over its alleged support for terrorism and issued new warnings about Tehran's nuclear program. Tension between Turkey and Kurds in northern Iraq, and fresh doubts about OPEC output levels also helped drive the price of oil up $3.36 a barrel, or 3.8 percent.

Although the Bush administration is not openly threatening a military strike against Iran, the president recently spoke of needing to avoid "World War III," and Vice President Cheney said that the United States would "not stand by" while Iran continued its nuclear program. "We will not allow Iran to have a nuclear weapon," he said.

Oil traders said that even if the chances of military conflict with Iran were small, the huge run-up in oil prices that would result encourages some speculators and investment funds to bid up the price of oil, adding a premium of $3 to $15 a barrel.

"It will be chaos. . . . I can't really see it," said Abdulsamad al-Awadi, an oil trading consultant and former executive at Kuwait Petroleum. "Having been in the marketplace for almost 30 years, I can't see a scenario for it, or precautionary measures" that oil companies could take. "There are no precautionary measures."

"If war breaks out, anticipate that all hell will break loose in the oil markets," said Robin West, chairman of PFC Energy, a District oil consulting firm.

"If it's a clinical strike like the one that Israel carried out on the Syrian installations and no one admitted to doing it, you'd have a fierce reaction from Iran, but it would probably die down," said Leo Drollas, deputy executive director and chief economist of the Center for Global Energy Studies, a London think tank founded by former Saudi oil minister Ahmed Zaki Yamani. "If it were a botched job with lots of targets and civilians dying and Iranians retaliating . . . it could escalate and the price of oil could shoot up to God knows where."

Ominous warnings about oil prices have preceded other conflicts in the oil-rich Persian Gulf, and spikes in crude prices proved fleeting in the past.

But during earlier conflicts in the region -- the Iran-Iraq war in the 1980s, the Gulf War in 1991 and even the 2003 U.S.-led invasion of Iraq -- the world's oil-exporting countries had enough capacity to make up for the disruption in oil exports. Not so this time. Demand has grown, and output has fallen in many oil-producing countries.

Saudi Arabia, which accounts for about 8.7 million barrels a day, produces almost all of the world's excess oil and is capable of boosting output by about 2.5 million barrels a day, Drollas said. Iran produces about 4 million barrels a day and exports 2.5 million barrels a day.

Moreover, while some members of the Organization of the Petroleum Exporting Countries fear that high prices would hurt oil demand and undercut long-term revenue, others see no need to boost output. In a meeting with reporters in Caracas yesterday, Venezuelan energy minister Rafael Ramirez said that the market is "well supplied." Earlier, Venezuelan President Hugo Ch¿vez said he expected oil prices to climb higher.

"Can the world do without Iranian oil exports at the present time? The answer is: just," said a senior planning executive at a major European oil company who spoke on condition of anonymity because the company has a policy not to publicly discuss oil prices. "There is enough spare capacity to offset Iranian exports, but it would be very tight. If every spigot were open everywhere, including Saudi Arabia, that should just about cover it. But it's not comfortable."

"That's just arithmetic," he added, "but is it all as simple as that? The question is: What would the Iranians do in retaliation?"

He and others noted that Iran would not need to attack well-guarded facilities in places like Saudi Arabia or harass tankers in the U.S.-patrolled Strait of Hormuz, at the head of the Persian Gulf. It could simply collaborate with Shiite forces in southern Iraq to cut off Iraq's roughly 1.7 million barrels a day of production, further weakening its neighbor while driving up prices for its own exports.

"Certainly when you lose 2.5 million barrels a day of Iranian production, which is the most likely case scenario, that will literally just make the market go berserk," al-Awadi said. Asked whether the companies he worked with had contingency plans, he said, "The oil industry does not have contingency plans. We are not military people."

The senior executive from the European oil company said that his firm did not have contingency plans, either. "You come to a point where you say it's indefinable," he said. "You sit around and ask, 'What would we as a company do differently?' The answer is nothing. You deal with it at the time."

Most industrialized nations do have contingency plans; they have strategic petroleum reserves that could be tapped during an emergency. The U.S. Strategic Petroleum Reserve, which was tapped during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005, has nearly 700 million barrels, enough to cover about 68 days of U.S. oil imports from all sources.

Yesterday, Secretary of State Condoleezza Rice said that Bush is "committed to a diplomatic course on Iran," but she added that U.S. patience is "not limitless, and allies need to know that."

"These crises have a habit of bursting on the scene and leading to unforeseen places," Drollas said. "Everyone wants it not to happen, but it's like a crash happening slowly. You can see the two cars coming toward each other. . . . There's an inevitability about it."

http://www.washingtonpost.com/wp-dyn/content/article/2007/10/25/AR2007102502840_pf.html