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Page added on September 30, 2009

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Resolving Iran Oil-Price Risk

It hasn’t been easy keeping up with all the recent developments related to Iran’s nuclear program, which still looms as a large, unresolved risk embedded in the global price of oil–though you would never know it from the behavior of oil markets in the week since Iran’s hidden nuclear enrichment site was revealed. It’s not clear whether traders have concluded that the exposure of the Qom site strengthens the hand of the US, Britain, France and Germany sufficiently to make a diplomatic solution likelier–and conflict correspondingly less likely–or the impact of this story has been overwhelmed for the moment by weak market fundamentals. After all, this is merely the latest phase of a crisis that has been simmering for a number of years; a wait-and-see attitude looks prudent, particularly in light of the market’s current capacity to adjust for the temporary loss of Iran’s oil output, should that ensue. However, I believe that we are also approaching the point at which much of this uncertainty resolves, because fairly soon the US and its allies must choose either to act decisively to prevent Iran from acquiring nuclear arms, or relinquish those options and focus on containing the threat.

…As I noted last fall, lower oil prices have created a window for a set of actions–truly crippling sanctions, a naval blockade, or air attack on the facilities in question–that would have been unthinkable when oil was marching steadily toward $100/bbl and beyond. That window will begin to close once the global economy resumes growing rapidly enough to erode the healthy cushion of spare global oil production capacity that now stands at 5.5 million barrels per day–a buffer that would also erode from the other direction if new oil projects fail to keep up with oil’s intrinsic decline rates.

The Energy Collective

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