February 21, 2012

This Weekend’s News: The Geopolitical Story Behind Higher Oil Prices

There is a lot of chatter this morning about the potential for gas prices to hit $4 or $5 a gallon by Memorial Day, which could undermine stronger U.S. economic growth. Here are a few stories from the weekend that provide some of the geopolitical back story about why oil and gas prices are climbing. 

Perhaps the big story over the weekend was Iran’s
announcement on Sunday that it will suspend oil shipments to Britain and France
in response to their embargo against Iranian oil, which – along with the rest
of the European Union (EU) – is set to take effect in July. The announcement was
seen as more symbolic than significant, given that Britain and France are not
nearly as dependent on Iranian oil as other European countries are. According
to The Huffington Post, “Analysts
said Iran's announcement would likely have minimal impact on supplies, because
only about 3 percent of France's oil consumption is from Iranian sources, while
Britain had not imported oil from the Islamic republic in six months

It is unclear to what extent Iran would continue to restrict
exports to Europe in advance of the July embargo, when existing contracts with
the EU are set to expire. The New York
reported that, “Iran
may also be reluctant, when its economy has been damaged by existing sanctions,
to deprive itself of revenues from its larger European customers
.” What is
more, Reuters announced on
Monday that China’s Unipec – one of two major buyers of Iranian oil – is
expected to purchase less oil from Iran in 2012; how much less oil is not clear
from the initial report
. That announcement could have an impact on Iran’s
strategic calculus.

The announcement from Tehran on Sunday contributed to higher
oil prices on Monday, pushing the cost of a barrel of oil to a nine-month high.
On Monday, The Huffington Post reported
that, “By
early afternoon in Europe, benchmark March crude was up $1.91 to $105.15 per
barrel in electronic trading on the New York Mercantile Exchange. Earlier in
the day, it rose to $105.21, the highest since May. The contract rose 93 cents
to settle at $103.24 per barrel in New York on Friday

Analysts believe the price increase has less to do with the
impact on Britain and France given their small dependence on Iranian oil, and
more with rising tensions between Iran, Israel and the West.  "The
price rise is more a reflection of concerns about the further escalation in
tensions between Iran and the West
," commodity analyst Caroline Bain
of the Economist Intelligence Unit told The
Huffington Post
. "Banning
the tiny quantities of exports to the U.K. and France involves very little risk
for Iran – indeed quite the opposite, it catches the headlines and leads to a
higher global oil price, which is something Iran is very keen to encourage

Meanwhile, on Sunday Japan announced that January marked the
largest trade deficit on record, in part due to energy demand. The Wall Street Journal reported that, “Japan
posted its largest monthly merchandise trade deficit on record in January, as
exports to China and Europe fell sharply while imports surged due to stronger
fossil-fuel demand to make up for reduced nuclear power output
.” According
to the report, “Imports
gained 9.8% from a year earlier, the 25th straight month of growth. Imports of
liquid natural gas, crude oil and coal all increased

These are just a few of the stories trending. We'll keep an eye out as they continue to develop. 

This Week’s Events

Today at 3:30 PM, head to the Aspen Institute for Business
Solutions to Enable Energy Access for All

On Wednesday at 10:30 AM, the Bipartisan Policy Institute
will host Cyber
Security: New Models for the Future
.  At noon, head to the Wilson Center for Reaching Out
at Rio: Population Growth, Family Planning, and Environmentalists
. At
5:30 PM, head over to SAIS for Trans-Boundary
Water Management in Central Asia: Challenges and Opportunities

On Friday at noon, AEI will host Clean, Green,
Renewable: What Could Go Wrong?
At 1:30 PM, head to Stimson New Nuclear
Agenda: Prospects for US-Japan Cooperation