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Countdown to $100 oil (25) - Iran vows that oil prices will not go down

by Jerome a Paris Tue Apr 4th, 2006 at 06:10:20 AM EST

We've been discussing the possibility of some form of war or conflict with Iran repeatedly, and the oil markets have certainly taken notice of the "increased chatter" on that topic.

Together with the ongoing unrest in the oil producing provinces of Nigeria, the market was unpleasantly surprised by the test by the Iranian Navy of a new ultra-rapid torpedo, seeing it as both an escalation of the crisis by the Iranians (thus increasing the likelihood of conflict), and a very serious threat to supertanker traffic in the Persian Gulf.

Prices went up by 2$ in an instant, not an unsignificant jump, and bringing them at their highest ever, barring a couple of days after Katrina struck.


But the most worrying is probably the declaration by the Iranian vice-Minister for oil:


Mohammad Hadi Nejad-Hosseinian, Iran's deputy oil minister, yesterday hinted at Iran's ability to influence the oil price when he said: "Any fall in oil prices this year is unlikely...A sum of factors show that prices will not fall in the next two or three years unless there is a conspiracy against oil."

(A more complete quote can be found here - the only additional information is that he mentions the 50-60$ range for prices).

This looks very much like a show of muscles by Iran, and a very clear indication that they are warning the White House as explicitly as they can that thye have weapons available to retaliate to any attack:

(i) the ability to sink supertankers, and possibly US Navy ships;
(ii) the ability to keep oil prices high (and, this is not said, but it is true, a lot higher if need be).

We've all heard the arguments that this White House has a logic of its own and will not be stopped by such "facts on the ground", and will keep on pushing for a confrontation, but the Iranians are throwing down the gauntlet and effectively telling the chimperor that he is naked. What will he do?

The markets obviously find it credible that he will keep on pushing, and are beginning to price this accordingly, with prices at pretty much the same record highs as when 1 mb/d of production were brutally pulled off the markets in the Gulf of Mexico following Katrina's passage, and quotes like this one suggest that this is not over:


"Current price levels for crude oil are an accurate reflection of supply and demand fundamentals and, arguably, prices would be even higher were the full range of geopolitical prices accurately priced in by the market," said Kevin Norrish, of Barclays Capital.

Call this the Bush tax on oil.

Paid by US (and other) consumers directly to Iran, the supposed enemy. How smart is that? Is the fact that a part of that "tax" goes in the pockets of his oil friends in Texas enough to justify that $200 billion surcharge on US consumers? (considering the increase in oil prices over 40$/bl only).

The mullahs are laughing all the way to the bank. They hold us by the balls, and Bush is basically saying "nah nah nah you won't dare squeeze, raghead!".

Oil wise, Bush is a squeezer, not a squeezee. Traitor, anyone?

Earlier "Countdown Diaries":
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to 100$ oil (21bis) - long term vs short term worries
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1)

Display:
And the link to the same on dKos: http://www.dailykos.com/story/2006/4/4/6826/84176

I'm taking a plane this afternoon, so I may be out for a chunk of the day, and will probably be around less in the next 2 days.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 06:17:12 AM EST
You fail to mention this
Venezuelan president Hugo Chávez is poised to launch a bid to transform the global politics of oil by seeking a deal with consumer countries which would lock in a price of $50 a barrel.

A long-term agreement at that price could allow Venezuela to count its huge deposits of heavy crude as part of its official reserves, which Caracas says would give it more oil than Saudi Arabia.
"We have the largest oil reserves in the world, we have oil for 200 years." Mr Chávez told the BBC's Newsnight programme in an interview to be broadcast tonight. "$50 a barrel - that's a fair price, not a high price."

which makes the geopolitical calculus a lot more interesting. Basically, the US is—through oil prices—caught in a tug-of-war between Bolivarians and Ayatollahs.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 06:22:43 AM EST
Why is it a tug of war?

Chavez wants a floor on oil prices at 50$ to make certain that investments in his heavy oil reserves can be economic.

The Iranians say that won't let oil prices go down below 50$.

It's just not clear to me what the WH wants for oil prices. I nkow what they want for oil itself, but as for prices...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 06:31:14 AM EST
[ Parent ]
Chavez wants oil to remain around $50, while the Iranians would be happy to have $100 oil or higher if the going gets tough with the US.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 06:32:34 AM EST
[ Parent ]
No , he says he wants "at least" 50. Being smart, he says that he can live with 50 if it is guaranteed to him by the West, and he thus appears generous (or will appear in retrospect "see the deal I was offering you back then"...)

I doubt that he will mind if it goes up more.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 06:37:54 AM EST
[ Parent ]
Doesn't dealing directly with the consumer countries undermine OPEC, and also qualify as "a conspiracy against oil" (since this is heavy tars that we're talking about in Venezuela) in the words of the Iranian minister?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 06:43:50 AM EST
[ Parent ]
To some extent, you are right. But note that Venezuela and Iran have always been the two most hawkish members of OPEC, pushing for higher prices.

At this point, a hard $50 floor would have value for the producers - it guarantees them a minimum (and already pretty high) level of income, and thus predictability in their budget, which would allow them to make nice promises to their population and actually fulfill them. And guaranteeing a floor does not precluse higher prices.

And of course, Chavez is making this offer safe in the knowledge that it will never be accepted by the West, so his "generosity" costs him nothing.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 08:34:08 AM EST
[ Parent ]
So, this has no effect on peak oil, correct?  Just who makes the most money during the race to the bottom?
by raincat100 on Tue Apr 4th, 2006 at 11:48:48 AM EST
[ Parent ]
Why can't Venezuela start selling $50 synthetic oil futures, then?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 06:45:01 AM EST
[ Parent ]
To make the investment profitable in that sector, you probably need more than the 5 years or so of future markets that exist today - 10-15 years of guaranteed prices would likely be required, and the market for that doesn't exist.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 08:35:31 AM EST
[ Parent ]
It doesn't exist because nobody has tried, right? Could Venezuela get in touch with the exchanges and offer itself as a market maker for an experimental run of 10-year futures?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 08:38:36 AM EST
[ Parent ]
But who would be the counterparty?
i.e. who would accept to commit today to pay no less than 50$/bl for the next 10 years, for specified volumes?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 09:22:47 AM EST
[ Parent ]
If, as you showed in part 24, 5-year forwards are at $65,

I find it hard to believe that there isn't a market for 10-year forwards at $50.

For instance, Sweden has said they want to be oil-free within 20 years. It would make sense for them to lock in supplies for the intervening 20 years.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 09:29:13 AM EST
[ Parent ]
Oh, I agree that it would make sense to buy such a contract, and you identify a potential entity that could do it.

It simply has not been done yet.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 12:31:54 PM EST
[ Parent ]
Venezuala needs considerable refining infrastructure to be created before they can even think about selling this stuff and that, with all the best will in the world, cannot be in place for 3 - 4 years. Refineries don't come ready made out of the box.

So Iran has our attention and can push the price where it likes and nothng Chavez says about the future will change that present.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Apr 4th, 2006 at 07:51:33 AM EST
[ Parent ]
But Iran won't get nukes for another 5 years... I see a strategic partnership between Bush and Chavez in the horizon. </snark>

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 07:56:01 AM EST
[ Parent ]
Bush needs his war much sooner than within 5 years. Before the November mid-terms most likely.

Expect a mid-october "suprise" invasion. Early enough to affect the polls with patriotic fervour, late enough that it cannot possibly start going wrong before the polls close.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Apr 4th, 2006 at 08:01:06 AM EST
[ Parent ]
The US has a substantial strategic oil reserve, but no gasoline reserve (we saw this when, after Katrina, the US asked the EU to release part of its strategic gasoline reserve). The US could build a strategic gasoline reserve in the intervening months, as well as fill its oil reserve to capacity, as a way to weather the storm for as long as it takes to take control of the Hormuz Straits.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 08:12:29 AM EST
[ Parent ]
"as a way to weather the storm for as long as it takes to take control of the Hormuz Straits."

Which will take about as long as it's taking to pacify Iraq no doubt.


keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Apr 4th, 2006 at 09:09:48 AM EST
[ Parent ]
pretty much, yeah.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Apr 4th, 2006 at 09:20:32 AM EST
[ Parent ]
There is no way on Earth that the US can reliably control Hormuz for any length of time. The only way to guarantee control would be an army of occupation and a regime change in Iran. And that's not likely to happen.

Don't forget that Iran has medium range missiles, and would be perfectly capable of doing remote damage to US land and sea forces in Iraq, Turkey and other areas in the Middle East if it decides to get defensive. It would take an incredibly successful and coordinated initial barrage from the US to remove that capability. And that's not likely to happen either.

I think it's more likely that this whole pantomime is yet another cynical move to drive up prices. Bush probably doesn't much care that it will ruin the US as long as his Texas and Saudi buddies are getting richer. He really does seem to be that stupid, disconnected and cynical.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Apr 4th, 2006 at 09:39:37 AM EST
[ Parent ]
I actually think regime change is likely: the current supreme leader is a moderate as I understand it. They do have extremists as well.
by Colman (colman at eurotrib.com) on Tue Apr 4th, 2006 at 09:47:28 AM EST
[ Parent ]
The EU shipped gasoline to the US after Katrina?

Probably a stupid question. I just don't understand what releasing strategic gasoline reserve means, but would like to learn.


Atlantic Review - A press digest on transatlantic affairs edited by three German Fulbright Alumni

by Atlantic Review (bl -at- atlanticreview dot org) on Tue Apr 4th, 2006 at 10:04:46 AM EST
[ Parent ]
After the 1970's oil shocks, the EU introduced a requirement for all countries to keep 60 (?) days worth of gasoline supply in stock as a strategic reserve.

The US has a strategic crude oil reserve, which Bush filled up to capacity for the first time in many years at some point in his first term - must have been in 2002, but I don't remember.

The Village Voice: Pumping Us Dry (September 2nd 2005)

Katrina tragedy is an absolutely perfect storm for oil companies
...
If the companies can't increase their refined products, they could end up turning not to the petroleum reserve but to the European Union. While the U.S. keeps a supply of crude oil in its strategic reserve, the Europeans maintain a stock of gasoline as well as crude. There has been speculation that in a really tight situation, the EU might be called on to export some of that supply to the U.S.
Read about it also on A Fistful of Euros (same date).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 4th, 2006 at 10:12:17 AM EST
[ Parent ]
Sweden has 90 days supplies officially (down from 180 during the cold war). But a friend of mine took a look and concluded that since most of the requirement is privatised (if you use much you are obligated to hold some in reserve) and their is no inspections there are probably not anywhere close to 90 days of actual reserves.

Don't know if it is the same in the rest of EU.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Apr 4th, 2006 at 11:05:55 AM EST
[ Parent ]
Ah, okay, thank you.
So the EU released the gasoline to the market. This helped to get the price of gasoline down?

I didn't know gasoline was traded internationally as well.


Atlantic Review - A press digest on transatlantic affairs edited by three German Fulbright Alumni

by Atlantic Review (bl -at- atlanticreview dot org) on Tue Apr 4th, 2006 at 12:12:10 PM EST
[ Parent ]


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