$100 per barrel oil price unfounded
By Karen Remo-Listana
Posted: 22 March 2006
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Claims that oil price will hit more than $100 per barrel in case of an Iranian cut off of oil exports are unfounded, an energy economist said.
 A. F. Alhajji, George Patton Chair of Business and Economics at Ohio Northern University and a former energy programme moderator at the Gulf Research Centre said: “ It is unlikely that Iran will reduce its oil exports. It is not in its interest to decrease exports, let alone to halt them. However, domestic pressure, a sense of nation ali sm, and the need to improve its bargaining power with western countries might force the Iranian government to ret ali ate.
“ Regardless of what happens, it is clear that Iranian nuclear standoff will not lead to a new energy crisis. It will only increase prices and increase market volatility. In the long run, the impact of the Iranian nuclear standoff will be limited to a decline in growth in Iranian exports.”
With t he high economic and political costs of using the oil weapon, Iranian operatives in Iraq may cripple Iraqi oil exports from Basrah port instead of reducing Iranian oil exports, Alhajji said.
This option, which will reduce world oil supplies by about 1.1 million barrels a day, will hurt US and the UK plans for Iraq while it boosts Iran ’s oil revenues.
Alhajji added: “ Given Iranian resentment against the buy-back contracts, UN sanctions or an air strike might provide the Iranian government with a golden opportunity to revoke the buyback contracts of several Western and Asian companies and force them to leave Iran or sign new contracts that are more favourable to Iran .”
 Such action can only impact Iran ’s oil production moderately as many of the contracts related to fields are still under development. Decline in exports will just be around 500,000 barrels a day and the decline will be gradual, he said adding that most of the impact will be limited to panic buying, stockpiling, and speculation.
Al Hajji said: “ Pr ices will increase by an average of $4.50 per barrel only. In other words, the impact of a decline in Iranian oil exports or a halt of Iraqi oil exports will be limited and much less than what some experts have predicted.
“On average, the maximum impact from the loss of all Iraqi oil exports is less than $5 per barrel and less than $20 per barrel from the loss of all Iranian oil exports.
Prices will increase sharply immediately after the production cut, but will decrease soon thereafter as a combination of SPR release and an increase in OPEC production will cover any amounts of cuts.”
“An IEA coordinated strategic petroleum reserves (SPR) release will add two million barrels a day to the market. Within four to five weeks, the rest of OPEC members can add about 900,000 barrels per day. The rest of OPEC members will keep adding new production capacity through the year, which will add up to an additional one million bpd,” he added .
What will really cause an energy crisis is not the decline in Iranian or Iraqi oil production but the attempts of the government to control fuel prices, Al Hajji suggested.
He said: “Free markets work, especially if governments limit their policies to correcting market failures. During the 2005 hurricane season, the IEA’s decision to release 60 million barrels from the SPR and the suspension of specific environmental regulations in the US contributed to increased supplies.
“These actions also increased US gasoline imports and put downward pressure on crude and products prices. At the same time, federal and state governments rejected calls for price controls and direct intervention in pricing. This inaction allowed market forces to work.”
Although any possible oil cut from Iran may not cause energy crisis, increase in oil price is still inevitable. In addition to panic buying, Al Hajji said most of the increase in oil prices will be related to the inability of Saudi Arabia and its neighbors to ship all their oil to world markets and the high shipping insurance premiums.
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