Thomas Kleine-Brockhoff: Downplaying Iran’s Oil Leverage

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So, we shouldn’t worry too much when Iran threatens to suspends oil exports in case of economic sanctions, suggests Secretary of State Condoleezza Rice. She says: “I think something like 80 percent of Iran’s budget comes from oil revenue, and so obviously it would be a very serious problem for Iran if oil were disrupted.”
Interestingly, many politicians seem to think in terms of all-or-nothing alternatives. As if Iran can only shut off oil supplies or leave the valves open. Here is a question: about 4 million barrels of oil from Iranian production are floating around the global markets every day, currently at about 70 dollar a barrel. What if Iran were not to suspend, but only to curb oil exports, by — say — a million barrels? How much would the price of oil have to increase for the Iranians to make more money while exporting less?
And what would the boycotting West do then?
Thomas Kleine-Brockhoff is the Washington Bureau Chief of the German weekly DIE ZEIT.

Comments

5 comments on “Thomas Kleine-Brockhoff: Downplaying Iran’s Oil Leverage

  1. Hydrocodone says:

    Welcome to Great Blog here!

    Reply

  2. eCAHNomics says:

    Good correction by jkarn. Total worldwide oil revenues would increase if supply were reduced by 1 mmbpd, but if Iran were the sole reducer, the story might be different for that country. Iran exports 2.5 mmbpd, so a 1 mmbpd reduction would be 40%. Perhaps the price increase under emotional & speculative conditions might make up for such a sizable a reduction for Iran, but perhaps not–certainly not under ordinary circumstances. Still, oil export revenues (price times qunantity) for Iran might not be reduced as much as Rice thinks. And, Iran has certainly been able to build a nest egg at current oil prices.
    Next step is to think about what other oil producers might do. Simmons thinks Saudi Arabia has maxed out and date support his conclusion. Venezuela might (certainly?) look for an opportunity to screw the U.S. Russia would try to increase supply, but seemingly can’t do much in the short run; otherwise they’d have done it already at current $70+ prices.
    Iran seems unlikely to play the reduce supply game unless pressured. Still, the risk seems more biased toward the negative for the U.S. than for Iran.

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  3. JDM says:

    If the Iranians could make more money by reducing exports they would have already done it.
    As economists like to say, there are no (maybe a very few) $20 bills lying in the street.

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  4. karen says:

    What would the west do then?
    I suppose we’ll all have to get our bicycles out!!!!(Perhaps overweight America could afford to lose the weight biking around to Micky Dees)

    Reply

  5. T. Hudson says:

    Something else that I haven’t seen mentioned at all in the domestic press but read everyday about in the Kuwaiti Times and the Khaleej Times is the “Gulf Common Market”, an attempt to make a “Gulf Euro” that covers all of the major Arab oil producers on the Persain Gulf (UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait) to form a common currency. If OPEC were to re-price barrels of oil into this new, non-dollar pegged currency, it would almost certainly have very strong reprecusions for the US economy.
    I wonder if it would be sufficient motivation for China to float the renminbi or to re-peg it to this new currency. They would take an immediate writeoff on the massive amounts of US debt that they hold, but they may make the long term trade off that future energy costs are more important than short term gains from trade with a declining empire.

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