NASA
This high-resolution photograph taken from the International Space Station shows detail of the tanker dock facilities, tanks and other infrastructure on Kharg Island, a key exporting facility for Iranian oil.
If yesterday’s $3 a barrel technical correction in oil markets shows anything, it is that the Iranian nuclear issue is not currently hitting the radar screen of oil traders. Iran’s sudden confirmation of a second secret nuclear facility should have pushed oil prices up, not down, but the so-called Middle East terror or war premium still seems to be lacking from Wall Street’s thinking in the oil futures pit. But that doesn’t mean oil players shouldn’t be watching the geopolitical comings and goings about Iran. The Iranian nuclear factor remains the single largest geopolitical risk currently facing the global oil market.
While the United Nations sits and does little more than hand-wringing about Iran’s nuclear program, there does appear to be movement behind the scenes with the U.S. announcement cancelling plans to put missiles in Poland and the Czech Republic and NATO’s subsequent invitation to Russia to consider a joint missile shield. However, it remains unclear whether Russia will really play ball and both abandon support of Iran and participate in a nuclear umbrella that could include Israel.
Saudi Arabia is likely to remain mum on the subject but its reaction to Iran’s nuclear aspirations could eventually be a key factor in the complex geopolitical quadrangular relations of Russia, Iran, Saudi Arabia and Israel. Behind the scenes, Saudi Arabia has sent signals to Russia that today’s comfortable oil price of $70 could become a thing of the past, should Riyadh feel that a Russian-Iranian axis is too threatening to its national security. But since Iran can pose a potential military (or indirect sponsored terrorist) threat to Saudi Arabia, its Gulf Arab neighbors and their oil installations, the question is: Would Saudi Arabia really open up the spigots and flood oil markets with extra crude oil to put Russia and Iran under pressure to come to the negotiating table and thereby forestall the need for an Israeli military strike? Or, would they wait until after the Israelis have struck and kindly grab Iran’s oil market share, should Israeli military intervention disrupt the oil market. Some might argue that Kharg Island, a key Iranian seaport for its oil exports, is a more “persuasive” target for Israel to hit than just striking Iran’s known nuclear plants because the Iranian government is so financially strapped.
Some analysts are saying that Israel won’t have the political will or capability to strike Iran but inside Israel, a nuclear-armed Iran is viewed by many Israeli citizens as an existential threat; therefore, an Israeli military response cannot be ruled out. For global oil markets, a serious deterioration in the diplomatic effort to find a solution to the Iranian nuclear aspirations standoff could become a feature that ushers in renewed price volatility.
— View an April 29, 2009, Baker Institute webcast of Amy Myers Jaffe discussing the current geopolitics created by Iran’s nuclear aspirations and the effect on international oil
— Download “The History and Politics of Russia’s Relations with OPEC” (Baker Institute, May 2009)
— Download “Iran, Energy and Geopolitics” (Baker Institute, May 2008)
Amy Myers Jaffe is the Baker Institute Wallace S. Wilson Fellow in Energy Studies and director of the Energy Forum. She is currently participating in an online debate on climate change hosted by the Economist.com.