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Could the world handle an Iranian oil crisis?


Lately, oil markets have been jittery over fears that Europe’s new embargo on Iran could spark tensions in the Persian Gulf. So how would the world cope with an Iranian oil crisis, if it came to that? A new paper explores our options — and none of them are pleasant.

In theory, the E.U.’s embargo on Iranian oil imports, set for July, is supposed to cut into Iran’s finances without cranking up the price of crude too high. “The idea here,” says Robert McNally, president of the Rapidan group, “is that if Iran’s other customers, like China and India, see that Iran is prohibited from selling 20 percent of its crude to Europe, those countries now have leverage to bargain down the price” of the leftover oil. So the sanctions depend on China and India flouting the embargo, but forcing Iran to take a loss. Europe and the United States hope this will all go smoothly. One big worry, though, is that Iran responds by lashing out — say, by trying to block the Strait of Hormuz, where 35 percent of the world’s seaborne oil passes through. That’s a big “if.” But it would make life excruciating for everyone.

As McNally details in a new report (pdf) for the Council on Foreign Relations, a serious and prolonged disruption of the Strait of Hormuz would dwarf the oil crises of the 1970s — there’s just so much more oil at stake here:

In the truly apocalyptic scenario, McNally estimates, a complete cut-off of the 17 million barrels of oil that pass through the straits each day could cause the price of oil to rise as high as 320 percent — which would “likely tip the global economy into recession.” Now, it’s unlikely the U.S. would allow that to happen. But even lesser disruptions (if, say, Iran started harassing ships or decided to cut off some of its exports) could push the oil price up $20 or $40 or more — the sort of spike that could really put the brakes on economic growth.

So how would the world handle an Iran-related oil shock? McNally considers a couple of options, none of them perfect:

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Filed under politics economy oil markets Iran Iranian oil crisis Europe United States Persian Gulf EU embargo on Iranian oil imports China India Strait of Hormuz

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