John Rapley
AFTER SLIDING somewhat late last year, world oil prices have resumed an upward trend in 2006. It may be temporary, in which case the world economy will weather the storm, as it has in the past. But it may be yet another sign that high oil prices are here to stay. Oil traders say that is because prices are now beginning to add an 'Iran premium'.
Driving this development is Iran's recent decision to resume uranium enrichment. While Tehran maintains that its intentions are peaceful, much of the outside world worries that Iran will develop a nuclear bomb. In a region as volatile as the Middle East, that is cause for concern. Especially since most of the oil which finds its way on to the world's commodity exchanges comes from this very region.
Iran's new president, Mahmoud Ahmadinejad, has already said that Israel should be eliminated. The spectre of an Israeli foe possessing nuclear weapons is obviously ringing alarm bells in Tel Aviv. There is a diplomatic process under way, involving the five permanent members of the United Nations Security Council. They hope to persuade Iran to back away from its nuclear programme. But should this fail to make headway soon, nobody doubts Israel would be willing to take matters into its own hands.
COVERT ACTIVITIES
Meanwhile, for months there have been reports that the Americans have been launching covert activities in Iran to try and undermine its nuclear programme. However, many observers maintain that it is not evident the Americans or Israelis will be able to achieve much through sabotage or bombing raids. Were Iran to press ahead, therefore, it might eventually precipitate a more significant military conflict. If it came to pass, such a conflict could interrupt the flow of oil from the region. Hence, the 'Iran premium'.
The Iranian government seems to be exploiting this premium to its advantage. Aware that the West in general, and the energy-hungry Americans in particular, would suffer badly from a surge in oil prices, Tehran seems to be calculating that the time is right for some high-stakes poker.
Domestically, as well, this seems to be a win-win game for President Ahmadinejad. While reform-minded Iranians may not like his Government, they tend to share the view that Iran has a right to a nuclear programme. His move is therefore popular. Moreover, any military actions by Iranian foes would almost certainly provide a rally effect for his regime.
ECONOMIC MISERY
However, it is not only Iran which has a card to play. As dependent as the world is on Iranian oil, so too is Iran dependent on the world's markets. Anything which cut the flow of Iranian oil would plunge the country into economic misery. In short, both sides have an interest in defusing this showdown by peaceful means.
Down the road, that may change. But for now, global economic and political conditions have stretched oil markets to their limits. The world economy continues to grow, and China is booming. Demand for energy shows no signs of letting up. Available capacity is stretched, and new production is coming on stream only slowly.
Yet, all the while, tensions keep popping up in producing regions. Civil conflict in Nigeria's oil-rich Niger Delta, disputes between Russia and her neighbours, periodic strife in Venezuela - such events keep interrupting the flow of energy supplies. So there is simply not much stomach for the possibility of a showdown over Iran.
High oil prices may slow the world economy, and new supplies may come on stream. Then, countries like the U.S. may enjoy a freer hand. But for now, the stakes appear high enough to forestall an outright confrontation.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
