Could a conflict with Iran constrict the global economic recovery?
As the possibility of either a European Union embargo on Iranian oil or an Israeli strike on Iran’s nuclear facilities increases, West Texas Intermediate crude oil has quickly risen to approximately $106 per barrel. According to an analysis by Deutsche Bank, each $10 increase in the price of crude oil decreases real GDP growth by 0.2 percent. Could a conflict in Iran constrict the global economic recovery?
- Iran’s economy could be severely impacted by the restrictions. In 2010 Iran was the third largest exporter of crude oil and contained the fifth largest reserves of natural gas. Because of their lack of refining capacity to turn crude oil into gasoline, diesel, and other usable fuels, Iran has to import 40 percent of the oil that is consumed domestically. With the U.S. and U.K. not importing Iranian oil and with an E.U. embargo set to be implemented in July, one has to think of the consequences.
- Crude oil prices could possibly climb. With an E.U. embargo and with pressure on South Korea and Japan to search for other sources, approximately 1 million barrels of oil per day (~1.5 percent of the daily supply) could be taken off the market. Both Saudi Arabia and the International Energy Agency could increase the amount of oil that they make available on the international markets, but crude oil prices could possibly climb over $125 per barrel over the short term.
- The possible effects of an Israeli strike on Iran. With almost one-fifth of the world’s daily oil supply flowing through the Strait of Hormuz, a strike in attempt to shutdown this waterway could cause crude oil prices to skyrocket. However, the probability that Iran could block this passage for more than one to two weeks is low. In the mean time, the high oil prices could severely constrain global economic growth.
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Oil. 21 Feb 2012. The Wall Street Journal. 21 Feb 2012.
Weisenthal, Joe. A Simple Rule of Thumb Regarding Oil and How it Impacts the Economy. 24 Feb 2011. Business Insider. 20 Feb 2012.
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