TODAY’S EDITORIAL
These were the figures Iranian President Mahmoud Ahmadinejad had in mind when he recently asserted: “You [the West”> need us more than we need you.” In anticipation of yesterday’s meeting in London, attended by diplomats from the United States, Europe, Russia and China to discuss referring Iran to the U.N. Security Council over its nuclear program, Iranian Economics Minister Davoud Danesh-Jafari issued a separate challenge. “Any possible sanctions from the West could possibly, by disturbing Iran’s political and economic situation, raise oil prices beyond levels the West expects,” he stated.
The ability of Iran to cause worldwide economic damage is no idle boast. Worldwide oil demand and supply are in precarious balance at the moment, a condition expected to remain for the foreseeable future. On the margin, therefore, Iran’s 4 million barrels per day are extremely important, all the more so given that nearly 3 million barrels are exported.
Last year, the world consumed about 85 million barrels of oil per day. In 2006, world demand is expected to rise by 1.8 million barrels per day, reflecting a rate of increase 50 percent higher than that in 2005. Meanwhile, there is extremely little spare capacity. Excluding Iraq, whose future oil output is as shaky as its post-invasion production has been disappointing, the spare capacity of the Organization of Petroleum Exporting Countries, which acts as the world’s swing producer, was a minuscule 1.4 million barrels per day in November, according to the International Energy Agency.
As the nuclear standoff with Iran has escalated, the price of oil has risen, approaching $65 per barrel. A crisis with Iran that removed millions of barrels per day from the world market could send the world oil price well beyond the $100 level, possibly tipping the world into a recession whose depth and duration are unknowable.
It is worth recalling that the world oil market has previously experienced the removal of millions of barrels of Iranian oil and the consequences weren’t pretty. In September 1978, Iran produced 6.1 million barrels per day. Then the Iranian Revolution took place. It reduced the country’s oil output by more than 5 million barrels per day by early 1979, causing oil prices to soar. Iranian output recovered a little, but then war broke out with Iraq in September 1980. Output collapsed again; world prices soared even higher; consumer price inflation in the United States reached double digits three years in a row (1979-1981); and America’s worst postwar recession produced an unemployment rate of 10.8 percent in late 1982.
