Persian Pain with No Western Gain

“The two most common elements in the universe are hydrogen and stupidity.”
― Harlan Ellison

February 22, 2012, crude oil futures for April gained 3 cents to reach $106.28 per barrel on the New York Mercantile Exchange, thereby marking the highest gain since May 2011.  While some attribute the price hike to the growing demand in Asia, the bigger blame is placed on Iran.  Tehran appears to be posturing with threats to block the Strait of Hormuz or cut oil supplies to U.K. and France, which have not imported as much oil as other European countries (e.g. Greece, Italy and Spain), but the growing tension over Iran’s reported nuclear enrichment program is largely behind the nearly 5-percent fresh spike in crude prices in the U.S. and Europe.  With a sense of inevitability of war, as the recent visit to Iran by the International Atomic Energy Agency proved unsuccessful, could anyone not expect that the crisis would trigger high oil prices?  While some naturally blame speculators for capitalizing on the anxiety over Iran’s saber-rattling with the West and potential supply disruptions, there seems to be little focus on how the West could be shooting itself on its foot by waging an unnecessary war at the wrong time. 

My January 5 blog piece examined the West’s misplaced euphoria about the pain its sanctions it believed to be creating for Iran and inevitable certainty of harm on fragile economies of the West from looming warmongering.  If it is not already obvious, the danger lies in stratospheric oil prices that would go beyond the Persian Gulf and derail the West’s economic recovery before the pain of any bloodshed.  Fearing a backlash at the presidential polls this November, the administration of Barack Obama is worried about the effect of crude prices on the economy, as it should be.  At $4 per gallon, with expected further rise, oil prices are starting to seriously bite U.S. consumers, even though the demand is low.

The problem is that even though the U.S. has reduced its dependence on foreign oil, specially from the Middle East, and it boasts highest domestic oil production in eight years as well as increased efficiency of the average U.S. passenger vehicle, changes in global oil prices inexorably reverberate through inter-connected markets laden with intricate speculative mechanisms.  With current high risk premiums attached primarily to the crisis in the Persian Gulf, the oil market is unlikely to bring prices down.  That would be damaging to recession-ridden economies whether high oil prices are short or long-term possibilities.