How Iran and Russia Could Cause an Oil Shock

How Iran and Russia Could Cause an Oil Shock

Reuters/The Fiscal Times

The good news behind the price increase that sent gas to $3.76 a gallon this past weekend is that it is being driven in part by the improvement in the economy and major stock indices. The bad news behind the spike – and the primary reason gas prices are expected to continue to rise through the summer –Iran.

With help from Moscow, and with continuing demand from markets like China and India to the east, Iran could still use its vast energy resources to counter sanctions by the West, complicating efforts to strangle the Iranian economy and end Tehran’s pursuit of nuclear weapons.

Worse, yet, if Russia and Iran were to collude to fix prices or cut supply, the impact on the global energy market would be immediate and severe. The two could cause an acute shortage of natural gas that would be felt the world over. And as the endgame between Iran and the West quickly approaches, creation of such a shortage might be Tehran’s only hand to play. And, it would give Putin yet another opportunity to play spoiler to the West.

The lines on Iran became clearer last fall when the United States and Europe led a U.N. Security Council effort to sanction Iran for its continued drive to develop nuclear weapons. China and Russia objected, and the effort went nowhere. So the European Union and United States acted. They both placed embargoes on Iranian oil set to take effect this summer. Europe receives some 20 percent of its oil from Iran, and the United States has pledged to stop Iranian oil from reaching world markets. All of this only adds upward pricing pressure on energy: Gas prices are expected to reach more than $4 this summer as a result.

At the same time, it now appears as if the standoff between Iran and the West is reaching a crisis point that could make this pricing pressure even more acute. Israel is poised to strike in an effort to stop Iran’s production of nuclear weapons, and President Obama, while arguing to give sanctions time to work, made clear on Sunday that the use of force against Iran remains a viable option.

“We all prefer to resolve this issue diplomatically,” Obama said in a speech on Sunday to the influential American Israel Public Affairs Committee. “Having said that, Iran's leaders should have no doubt about the resolve of the United States, just as they should not doubt Israel's sovereign right to make its own decisions about what is required to meet its security needs.”

Iran now finds itself backed into a corner. But it’s not without friends. Russia, in particular, has shown its willingness to tolerate Iranian President Mahmoud Ahmadinejad and has thwarted previous efforts to punish Iran. It also has been a thorn in the side of the West for a decade.

Markets to the East
The array of sanctions targeting Iran’s energy, shipping, ports, banking and commodities industries is already having a negative impact on the country’s economy. The Iranian rial has lost half of its value since September, and companies around the world have cut ties with Iranian businesses.

However, there are doubts about the long-term potency of the embargo, given that the country still has its key trading partners in the East. In addition, Europe can easily replace Iranian oil – and the continent has roughly three months of stock energy reserves.

Tim Boersma, a research fellow at the Transatlantic Academy at the German Marshall Fund, says the embargo simply allows time for more negotiations with the Iranian regime. “I’ve been puzzled by the question as to why Europe is in this whole embargo,” Boersma says. “This is costing Europe money and I’m not sure what the gains are, since China and India are buying up the Iranian oil that is not purchased by Europe. Surely it is a good sign of solidarity with the United States, but it is debatable what it leads to.”

Right now, China and India account for 45 percent of Iran's crude exports. Those countries said they are planning for a 10 percent reduction in imports due to difficulties caused by the embargoes, but they are not stopping imports all together. Japan, still reeling from last year’s nuclear disaster, also plans to continue to import Iranian gas. So while Western markets are closing, Eastern markets remain open for Iranian business.

The Russian Unknown
Vladimir Putin was re-elected Russian president this weekend, solidifying his base.  As the most powerful man in Russia since 1999, he has delighted in disrupting the West’s castigation of Iran. Putin’s most recent rebuke came last fall, when Russia refused to back U.N. sanctions against Iran, claiming they were no longer effective. In the past, Russia has also supplied Iran with weapons and nuclear materials.

The two countries also have shared energy interests. Russia and Iran are the world’s two biggest exporters of natural gas. Russia also has established a “strategic partnership” with Iran, linking the success of Russia’s state-run energy monopoly Gazprom with the success of the Iranian energy industry. Last April, Gazprom chief Alexei Miller and Iranian Deputy Vice President for Economic Affairs Ali Agha Mohammadi met in Moscow to discuss expanding ties between their respective energy sectors. In the past, Gazprom has shown its willingness to play politics with energy. In recent years, it has cut gas supplies to Europe during the coldest winter months.

As pressure grows on Iran, this energy partnership might be Tehran’s only outlet to fight back. If it decides to use it, the consequences for energy markets, and for the burgeoning U.S. economic recovery, could be severe,