Monday 27 February 2012

Oil at $150?

I am surprised that even the BBC now has a story carrying the likely plans on how Israel may try and attack Iran on its website today. So expected is this event that it seems barely worth a mention on the front pages these days. Yet such a war would have a global impact putting the Iraq and Afghanistan adventures in the shade.

Back home we can already feel the heat of this growing threat. Iran supplied UK diesel through a circuitous route and this can be seen in eye-watering pump prices of nearly £1.45 a litre - not long a this rate until it is £100 to fill up your car.

Reality will really hit home if this cold war turns hot. closing the straights of Hormuz will cause a massive speculative increase in the price of oil - yes, it may come down as speculators quickly look to book profits, but a Middle Eastern war is the last thing the Western, or indeed Global, economy needs.

In the past oil at over $100 has brought recession, look at the Reuters graph above, prices near $100 are highly correlated with recessions. Let alone $150 - let's think what this might mean for the UK and eurozone alone.

Firstly, straight back into real recession is nailed on - probably at least a full 1.0% off GDP which is already flat - maybe as much as too. Same for the Eurozone. As far as our debt dynamics are concerned, this means major misses to the fiscal consolidation programme - offset a little by the high inflation such a move will cause. A Classic stagflation scenariom, nasty. The Tories could certainly kiss goodbye to hopes of winning the next election.

On our already weak UK economy though, the blow is will be felt fairly badly. Let's face it nearly all consumer goods are either made of oil or packaged in it, some powerstations are oil fired - it will be messy across the board in terms of sector performace.

Worse, as an external shock there is nothing we can really do to prepare for it as a Country - except that with high oil taxes we are at least inured to high prices more than say the US or Spain, but not enough to offset much of the pain.

Politically the showdown with Iran has to come sooner or later, although an Arab Spring type event would be much more welcome. Economically, we just can't afford it in the next 3 years. I wonder how these trade-offs are playing out in Whitehall and Washington - we'll soon find out.


Anonymous said...

"closing the straights of Hormuz...."

will not be allowed to happen. The US has a carrier moving there and the supply of oil must be maintained.

It is however, where the real flashpoint might occur. Israel bombing Iran is just the precipitation event.

Surely, the case for frakking Blackpool grows stronger by the day, at least to mitigate our consumption for heating fuels?

Anonymous said...

As a matter of interest would deep mined uk coal have been economic at current oil prices?

Hovis said...

Economically, we just can't afford it in the next 3 years.

CU: You are assuming that the projected war is not engineered to keep things in check and keep our minds of bankrupcy and further power grabs. Yes I've been reading too much Zero Hedge but it makes sense in car-crash kind of way ...

Old BE said...

Can't we just print some oil?

James Higham said...

Politically the showdown with Iran has to come sooner or later, although an Arab Spring type event would be much more welcome.

Don't neglect Syria in this mix.

Nick Drew said...

anon @ 1:10 - having a carrier (or 3) in the vicinity isn't necessarily the same as keeping the straits open when you have suicide-wallahs on the loose: and (as mentioned here ad nauseam) Qatar's extensive fixed installations = most of our LNG = very vulnerable

shale gas will indeed become a very desirable alternative but large-scale production is years away at minimum, not months - and the politicos need to get their fingers out first

which they will, eventually, but not this week or next

anon @ 1:13 - some o the UK's deep coal is still being mined, along with a fair bit of open-cast. UK Coal (the biggest remaining producer) has mothballed some more deep coal capacity (meaning they continue pumping out the water); but still more has been abandoned

doesn't mean it can't be re-opened, but it does make it mor costly

@ $150 on a sustained basis, all sorts of things become economic - even bloody wind !

but sustained is the key, and another serious recession will knock it back down - possibly even below $100, though I've an idea it won't, IF the cause is serious ME conflict rather than 'just' the sov debt crisis.

CityUnslicker said...

Anon - Oil tankers are not going to sale through warzones. battle group stationed or not insurance companies won't stand for it!

Anons re coal and gas - helpful but not important, oil is the key constituent in products for which gas and coal are not immiediate substitutes. if Coal was a goer then UK Coal would not be such a total basket case, which it is.

Hovis - It i read zero hedge I would have made some better calls this past year. How you have a war in today's environment that is beneficial is beyond me - the system is far too weak to sustain it. the Arab Spring buggered the markets alone.

BE - printing oil, brilliant!

James - Syria, not looking auspicious for the forces of freedom - but if Iran steps in more openly that only creates worse probelms.

Budgie said...

Ahem! - Iran being a good reason for Nuclear power stations, then?

Nick Drew said...

yes please Budgie, to start up, errrr,

... next year ?

Budgie said...

ND, that is just being a clever-clogs. Our last Nuclear came on line 16 years ago. It would have been perfectly possible, and more economic than our current 'rush' start after such a prolonged stop, to continue building new every 2/3 years since.

Oil and Gas have fragile supply lines in the hands of often hostile nations. As is now being demonstrated - again. The world does not work on an idealised free trade basis. Jonny Foreigner does not owe us a living, nor does he owe us regular low cost gas and oil. We must shift for ourselves.

rogerh said...

Would America (as a whole) really care if Iran got a nuke? Ordinarily no but this is election year and Israel is in a bit of a fix. If America becomes independant of ME oil there is little need for expensive Middle Eastern allies and Israel might get forgotten. Worse, I doubt Israel could drum up much support from Europe. So the long-term future is not good and arrives quicker if Iran gets a nuke. The existential threat is not from nuclear immolation but the drying up of immigration and finance. This election may be Israel's last chance to gain full US support - hence all the fuss.

andrew said...

whatever happened to the severn barrage?

time for the israelis to invade blackpool

Electro-Kevin said...

"except that with high oil taxes we are at least inured to high prices..."

Do you think they'll reduce the tax to mitigate the impact ?

Nah. Pump prices will have to go up again and no amount of inuring is going to prepare us for that.

Nick Drew said...

yeah, sorry Budgie, a cheap shot I know

but here's another: the only new nukes anyone is talking about will substantially be at the behest of Johnny F: either the frogs, or (looking increasingly implausible) E.ON/RWE

choose your poison

we are where we are

Timbo614 said...

So.. No Blackpool gas in time, No nukes in time, Johnny F. has all the LNG and Oil and owns our power stations, the mines are flooded too...[Scratches head], hmm... Bugger, [Dusts off tin hat].

Checks Battery prices, Panel prices and LED bulb prices, Seed prices, water butts (there's a drought in the S.E.). Investigates Solar ovens - (not gonna be good at Christmas, damn).

Check Prices for 17 year old Jags, Hmm, would get more from the scrappie. Maybe I should turn it into a 3.2 litre generator :(

Back to Plan A [Shoves fork in ground] :(

farmland investment said...

Great post. The possibility of Israel attacking Iran seems to be way underestimated overall. 10-1 they do it without even telling the US in advance.

Anonymous said...

Just because something is too awful to contemplate is no guarantee it won't happen.

The EU leaders thought the break up of the EU was unthinkable and so did nothing serious about it.

No one wants to contemplate inflation at 20%.
No one wants to contemplate interest rates at 15%
No one wants to contemplate a quadrupling of petrol prices and a tripling of food prices FROM CURRENT PRICES.

Yet these things happened to us or our parents just 35 years ago.

And when the 1973 fuel crisis hit it moved the cost from a very low to a high price. We are already at a peak high price. Imagine not £1.35 a litre but £5.20 ?
It will go from high to unimaginable.

Inflation would go off like a rocket too, with stagflation surely being the result.

What happens to the 'new' internet when the cost of delivery is more than the cost of the item?
When food prices follow fuel prices and rise 3 or 4 times.

It won't be the end of society but it will mean a big change.

And just because its not very pleasant to think about doesn't mean it won't happen.

Timbo614 said...

@Anon 8:30

Be quiet, it is too scary already!
[Abandons small fork, gets out big one]

dearieme said...

What would happen to the oil price if Iran, or some little helper, proved capable of sinking a US carrier?

Electro-Kevin said...

10 US carriers to replace it.

To be honest they can't. The technology is way above what we are being told about.

Nick Drew said...

remember the diverted stealth-fighter-drone, Kev !

The General said...

Electro-Kevin, you haven't heard of the sunburn anti-ship missile then? Iran has swarms of them, if fired in large enough quantities they could probably overwhelm a carrier's Aegis anti-missile guns. All it takes is one hit and your carrier is a seven-reactor meltdown at the bottom of the sea. Aircraft carriers could well prove to be the battleships of the future!

As for the original article. The reason prices are rocketing is because we said we would impose sanctions on Iranian oil exports to Europe in June, in June mind, once we'd had time to make arrangements with other suppliers of course, and our oh so clever leaders told them this!

Well Iran called our bluff and told us that if we didn't like their oil, then they'd help us out and sell it to someone else, IMMEDIATELY, like the Chinese or Indians, who will be happy to buy it.

Talk about shooting yourself in the foot.

The facts with regards to Iran are these:

1. 1739. Iran invaded India. The last invasion they ever staged.

2. In the 1950's the west helped depose a democratically elected non-extremist leader and replaced him with the Shah (a brutal tyrant), because we wanted their oil on our terms.

2. The Iranians revolted and installed a theocracy. Not to my tastes as an atheist, but it's their country I guess.

3. We helped arm Saddam to fight them during the Iran/Iraq war. The war was started by Iraq.

4. Iran knows it has valuable resources coveted by others. It seeks to secure insurance against future theft. So it starts a program to develop nuclear weapons.

5. Iran increases its push for nuclear weapons, when it finds itself flanked by hostile US Troops in Kuwait, Saudi Arabia, Iraq and Afghanistan. Other considerations are a hostile and nuclear armed Israel in the neigbourhood, a nuclear armed and unstable Pakistan to the North-west, a benign, but still nuclear armed India to the west and a nuclear-armed Russia to the North (with a history of empire).

6. 2011 - Iran decides it really isn't keen on accepting freshly printed dollars for its oil and opens its own oil bourse to sell in currencies of its own choosing, as is its sovereign right.

7. The west know they are broke and will not be able to use funny money to buy oil from Iran, cripes! So they gee-up the bombers before Iran finally has the means to defend itself, fingers crossed.

Sorry, sorry. What I meant to say is they are a nation of mad mullahs (even the 25,000 jews who live there!, who will try to kill us all , especially peaceful Israel, who has only ever had wars with all its neighbours. These sub-human mad-men must be stopped!


The General said...

Pakistan to the North-east I meant to say!

The General said...

And India to the East! It's late and I've been drinking.