Iran’s Oil Embargo – A Cause for Concern?

The threat of Iran developing a nuclear weapon is becoming an ever more realistic possibility. Although Iran categorically deny that they are enriching uranium for anything more than commercial energy development, the recent trip by U.N delegates indicates other wise.

The European Union and America have placed a trade embargo on any imports of Iranian oil as well as prohibiting any organisations dealing with Iranian banks. It is worth noting that Iran is the third largest oil producing economy on the planet and is the second biggest member of the Organisation of the Petroleum Exporting Countries, formally known as the OPECs. The OPECs was setup in 1960 by 5 original member states; it now consists of 12 members mainly from Africa and the Middle East. The OPECs generally hold 2 meetings a year, one in March and one in September, and the main topic of conversation is deciding what their output should be for the forthcoming 6 months. The decision on output is predominantly to control the price of oil to protect their long-term interests. They hold 79% of the world’s crude oil reserves and 49% of the world’s crude oil production.

With Iran being the current leading state of the OPECs, there is cause for concern that the embargo instated by the EU and America will have a long lasting effect on energy prices. It is also worth noting that Iran controls one of the world’s most strategically important straits, a strait that 20% of the world’s oil runs through, this is the Strait of Hormuz. The bigger picture needs to be understood. Iran is head of the OPECs; the OPECs controls 49% of the world’s oil production and the embargo could affect the world’s largest producing conglomerate to alter their production and this will subsequently increase the price of oil. There is evidence that this is already happening. For the first time since July 2008 the price of Brent Crude oil surpassed $128 per barrel and there are predictions that it will surpass $150 per barrel this year. The price of crude oil is always a good measuring stick for energy prices across the board.

The basic price of anything is determined by simple economics. Supply and demand. As soon as demand out weighs supply, there will always be a surge in price. When a singular country has the power of being the world’s third largest oil producer, controlling an oil passage that 20% of the world’s oil runs through and is also head of a conglomerate that controls 49% of the world’s oil production there is a worry that it will be able to control basic economics when it comes to oil prices.

With the wheels in motion and the price of oil surging, can this be controlled? This week there have been reports that Singapore and India have started to re-enter into contracts with Iran to purchase their oil. On one hand there is a moralistic objection to this, equally there is a need to relieve the rest of the world’s oil producing countries to ensure the price of energy is maintained at a feasible level.

In a day and age where we scrutinise over a few pennies here and there on our balance sheet, it’s important to remember that the cost of energy affects our profit margins by thousands of pounds. It is therefore hard to criticise India and Singapore for buying Iranian oil when it inevitably will help reduce the average companies energy costs. On one hand you have Iran controlling the supply, but for there to be equilibrium in economics you need to have someone controlling the demand; that is where we can give thanks to India and Singapore.