Tuesday, 14 January, 2020

How will Trump’s Iran oil gamble affect the global economy?

US President Donald Trump’s attempts to make Iran abandon its nuclear ambitions and change its foreign policy is fraught with danger. After ripping up a nuclear agreement with Tehran, Trump is forcing China, India and Turkey to end imports of crude from the Islamic Republic.

Trump is gambling that there is enough oil from the US, Saudi Arabia and the United Arab Emirates to fill the void. But he is betting the world’s economy that events in the “shaky six” - nations with troubled political climates such as Algeria, Angola, Libya, Iran, Nigeria and Venezuela - do not spiral out of control.

So what will the impact be on the global economy?

If Iran carries out its threat to blockade the Strait of Hormuz, or if oil stops flowing from other hotspots, like Libya and Venezuela, there will be a number of consequences: Oil could hit $100 a barrel or more; about 0.6 percent could be wiped off global growth this year; and inflation could rise by 0.7 percentage points.

Nations facing inflationary pressures, that is rising prices, will not be happy. And the blowback could hit the already stretched American consumer, which will hurt growth. Gas prices have already risen seven percent to $2.89 in the last month.

Economic sanctions are increasingly being used to promote the full range of US foreign policy objectives. While the US cut off ties after the 1979 revolution, it has been estimated it has forfeited $175bn in export revenue as a consequence of not doing business with Iran between 1995 and 2012. That equates to 66,436 job opportunities lost a year.

So sanctions also hurt the nations imposing them.

“Can the US substitute Iranian oil - really no, because the crude quality matters. Iranian crude oil is heavy. US crude oil is light,” according to Sara Vakhshouri, founder and president of SVB Energy International. “The best match for Iranian crude oil is Saudi crude oil and the other closest is from the UAE.”

Before Saudi Arabia can increase its oil production, “they’re waiting to see how much Iranian oil supply is going to be excluded from the market, how much Iran can smuggle or sell informally and if the US government would come up with some waivers formally or informally. So they will wait … and then act accordingly to manage the market and substitute Iranian oil.

“If we want Saudi Arabia to cover for Iranian oil with its spare capacity, then if there’s any other event, the market would not have enough spare capacity to cover for that in an event of any major incident. And that would have significant impact on the [oil] prices,” says Vakhshouri.

Source: Al Jazeera

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