Obama Finds Oil in Markets Is Sufficient to Sideline Iran
After careful analysis of oil prices and months of negotiations, President Obama on Friday determined that there was sufficient oil in world markets to allow countries to significantly reduce their Iranian imports, clearing the way for Washington to impose severe new sanctions intended to slash Iran’s oil revenue and press Tehran to abandon its nuclear ambitions.
The White House announcement comes after months of back-channel talks to prepare the global energy market to cut Iran out — but without raising the price of oil, which would benefit Iran and harm the economies of the United States and Europe.
Obama could have waivered the sanctions by pointing out that they are likely to increase oil prices. As the piece describes it the administration says it believes that oil prices will not increase when it implements the sanctions. It is obvious that there are three big flaws with this thinking.
First it depends on an increase in Saudi Arabia's oil production. If such an increase is possible and sustainable at all it would take away the only world wide reserve production capacity. Any additional disruption in any oil supply from elsewhere -which eventually will happen- will therefore lead to high price spikes. The idea is to use the limited stored strategic petroleum reserves to control price spikes. Thus this whole idea only works with a limited time horizon. It is not sustainable.
The second flaw of the thinking that oil prices will not increase is that it does not anticipate any Iranian countermeasure. What happens if a pipeline in south Iraq blows up? What if some sabotage in the Saudi oilfields -most of them are in its restive Shia populated areas- takes away some of their capacity? What if Iran simply stops selling a large chunk of its oil?
The third flaw is the idea that oil prices solely depend on available supply and demand. Instead they also depend on expectations. As this strategy to press Iran and to keep oil prices from increasing is not sustainable what is the endgame to this "squeezing" of Iran?
For strategic and domestic policy reasons Iran can and will not cry uncle and give up its civilian nuclear program. Neither can the Obama administration, in an election year, make the necessary comprises for a negotiated resolution of this manufactured conflict. It seems then that there is no peaceful endgame possible and the only way to solve the issue will be a long war.
Oil markets, like all other markets, base their price finding also on expectations of future supply and demand conditions. As it is obvious that the Obama strategy will increase risks and leaves war in the Gulf as the only resolution of the crisis oil prices will increase further from their already high level.
As this seems obvious why is the Obama administration not seeing it? What is the larger plan behind this feigned naivety that "squeezing" Iran will not increase the price of oil?