Writing about last week’s presidential election in Iran, the Wall Street Journal’s Bret Stephens observed that the plebiscite was “so transparently rigged that the only serious question is whether the regime even bothered to stuff the ballot boxes.” President Barack Obama joined in with his own criticism, expressing his “deep concerns about the election.”
Of perhaps greater concern to the average American is whether there’s an oil story behind a vote that seemingly few people take seriously. Specifically, could problems in Iran lead to another oil spike that would show up in higher gasoline prices?
Although the answer is likely no (the price of a barrel of oil has fallen 4 percent since the elections), there are a few scenarios that might on their face impact oil supply.
The first one concerns Iranian oil exports, and whether crude will continue to flow from its ports despite internal unrest. Logic tells us that it will.
The reasons for this are basic. As much as oil lubricates our — and the world’s — economy, Iran needs foreign exchange far more than the world needs its oil. Especially considering the aforementioned internal unrest, the last thing President Ahmadinejad needs right now is a dollar shortage amid persistent questions about the veracity of the Iranian vote. Conclusion? Iranian oil will flow.
Assuming a scenario whereby violence leads to a shutdown of Iranian oil ports, is this something that should concern us? In the near-term maybe, but this wouldn’t materially impact oil prices over the long-term; the reason being that if Iranian producers bring less oil to market, other OPEC countries will gladly increase oil exports in order to fulfill their own needs with regard to foreign exchange.
But what if President Obama turns up the heat on Iran, and specifically on Ahmadinejad, over last Friday’s vote? Couldn’t Ahmadinejad retaliate by refusing to allow Iranian oil sales to U.S. interests?
The above is not outside the realm of possibility, but it’s also wholly irrelevant to the price of a barrel of oil. For one, the majority of foreign oil that reaches the U.S. comes from Canada.
Secondly, while the notion of an “embargo” is at first blush a bit scary, the greater truth is that embargoes of any kind are a major economic myth. Put simply, embargoes aren’t.
Indeed, during the mid-19th century similar fears of embargo arose in England, only in their case the product in question was food. One argument made at the time in favor of maintaining the country’s Corn Laws was that if England’s agricultural interests were decimated by free trade, there would not be food to supply its troops or its citizens in times of war. The problem, however, for those who defended the tariffs was that since 1810 England had been at war with near every European power, yet it still managed to import 1,491,000 quarters of wheat from the very countries it had been warring with.
During World War I, England’s blockade of Germany complicated the efforts of U.S. exporters to sell their wares to Germans. No problem there either. Instead of transacting with German interests, U.S. firms simply increased their exports to Sweden and other Scandinavian countries who in turn exported the U.S. goods to Germany.
Fast forward to the 1970s, when, despite the early ‘70s Arab oil embargo (Iran, as a non-Arab country did not participate) placed on the United States, America imported every bit as much oil during the embargo as before the embargo. Saudi oil minister Sheik Yamani admitted after 1973 that the embargo "did not imply that we could reduce imports to the United States … the world is really just one market. So the embargo was more symbolic than anything else."
Countries can impose all manner of selling restrictions on the items they export, but once those goods leave the port, there’s no accounting for where they end up. If every OPEC country were to place an embargo on the United States, the U.S. would still buy their oil, only from those they’d not embargoed.
Assuming Ahmadinejad restricts sales of Iranian crude to U.S. interests, those same interests will still buy Iranian oil; albeit from those the oil is sold to.
All this begs the question of why oil prices spiked in the early and late ‘70s. Conventional wisdom points to the aforementioned embargo in the early ‘70s, and unrest in Iran in the late ‘70s. History in both instances is flawed.
More realistically the oil price spiked both times because the dollar was in freefall, and oil is priced in dollars. Oil didn’t become expensive in the ‘70s, rather the dollar became cheap. Robert Bartley, the late editorial page editor of the Wall Street Journal, used to put the word ‘shocks’ in quotes when writing about the 1970’s “oil shocks.” His reasoning was sound because it once again wasn’t oil that spiked. Instead, the dollar weakened and its decline drove up the prices of all commodities, including oil.
In that sense, if there’s an oil story here it if anything hinges on the unlikely possibility that civil unrest in Iran turns into all-out war along the lines of Israel invading Iran during a time of weakness. If so, oil could realistically spike but this would mostly be due to the dollar’s decline amid a conflict that the U.S. military might not be able to avoid.
Happily, and as evidenced by the oil’s 4 percent decline since last week, the above scenario seems highly unlikely. More realistically, oil will continue to flow from Iran because irrespective of who ultimately takes control there, the country needs dollars.