How Iran and Russia Could Cause an Oil Shock
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The Fiscal Times
March 5, 2012

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.

An editor-at-large for The Fiscal Times, David Francis has reported from all over the world on issues that range from defense to border security to transatlantic relations.