A surge in oil prices last week to almost $70 a barrel on concerns about the restart of

Iran's nuclear program only hints at what may lie ahead.

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Prices could soar past $100 a barrel, experts say, if the

U.N. Security Council authorizes trade sanctions against the Middle Eastern nation, which the West accuses of trying to make nuclear bombs, and Iran curbs oil exports in retaliation. A sharp global economic slowdown could follow.

 

That's the dilemma the United States and European nations face as they decide whether to act. But Iran would also pay a hefty price if the petro-dollars that now represent 80 percent of export revenues are reduced, potentially stirring civil unrest in a nation with a 14 percent unemployment rate.

 

"They would shoot themselves in the foot," said Mustafa Alani, director of national security and terrorism studies at the Dubai-based Gulf Research Center. "It's one thing to test the market psychology, it's another to take the actual step and stop oil exports."

 

Iran, the second-largest oil producer within the Organization of Petroleum Exporting Countries, exports roughly 2.5 million barrels per day ? 1 million barrels more than current excess production capacity worldwide. It also controls the strategic Strait of Hormuz, a critical shipping lane in the Middle East.

 

"Even if Iran pulled a small amount of its oil off the market, say it pulled a half million barrels a day, I could see oil prices literally jumping over the $100 per barrel mark," said James Bartis, a senior researcher at Rand Corp.

 

But other oil analysts say prices would likely not climb much higher than $75 a barrel before strategic reserves would be released and demand would begin to taper off as economic activity slowed around the world.

 

So who would be hurt more? The United States and other nations say it would be Tehran and argue against succumbing to economic blackmail in any case. "We cannot be intimidated by economic threats from their side," Sen. Trent Lott (news, bio, voting record), R-Miss, told CNN.

 

The U.S.

Department of Energy estimates that oil exports finance about half of the Iranian government's budget. And while high oil prices have boosted the annual growth rate to about 5 percent, Iran has never really recovered from its 1980-1988 war against

Iraq and trade restrictions on sensitive technologies. The Iran Nonproliferation Act, which the U.S. Congress passed in 2000, deters international support for Iran to develop nuclear, chemical and biological weapons programs and missile-delivery systems.

 

For weeks, Iran's state television has sought to show a people united behind the leadership, showing passer-by on Tehran city streets expressing their support for the country's strivings for nuclear independence.

 

Still, Alani of the Gulf Research Center questioned "whether the ordinary citizens will be willing to risk sanctions and endure a lot of suffering like the Iraqis suffered for 13 years" under U.N. sanctions.

 

Oil consuming nations, meanwhile, have at least one ace up their sleeves ? crude reserves. The United States and other members of the International Energy Agency have a combined 1.48 billion barrels of oil in their emergency stocks. That's equivalent to about 600 days of Iran's net oil exports of 2.4 million barrels per day.

 

OPEC might be able to add 1.5 million barrels per day to world production, mostly from Saudi Arabia. And oil analyst Fadel Gheit at Oppenheimer & Co. in New York said Russia might be able to crank up exports by about 500,000 barrels once its domestic home-heating demand eases.

 

Gregory L. Schulte, chief U.S. delegate to the

International Atomic Energy Agency, accused Iran last week of deceiving the world about its atomic program, declaring that moves to haul it before the U.N. Security Council were meant to deny "the most deadly of weapons to the most dangerous of countries."

 

His comments were part of increasing international pressure on Iran since it removed seals from uranium enrichment equipment earlier in the month and said it would start small scale work on the process that can make both fuel and the fissile core of nuclear warheads.

 

"It's a very difficult situation where you don't know which side is going to blink first," said Leonard Spector, deputy director of the Monterey Institute of International Studies' Center for Nonproliferation Studies.

 

It's also not clear the United States could win a referral on sanctions at the Security Council, where members Russia and China are Iran's main allies. Both have strong economic and strategic ties to Iran, with China a large oil consumer and drilling partner and Russia a key supplier of arms and nuclear technology and services for what Tehran says is a peaceful program. Additionally, oil-rich Russia would benefit from higher prices and increased demand for its crude if Iran's oil were off the market.

 

Influential India, which imports 75 percent of the crude it consumes, some from Iran, is a wild card in the referral struggle.

 

It joined the U.S., Britain, France and Germany in September to back an IAEA resolution that set the stage for reporting Iran for violating the Nuclear Nonproliferation Treaty. But pressure is building on the Indian government not to vote against Iran when the 35-nation IAEA board meets Feb. 2 to consider actual referral.

 

"India must not allow itself to be dragooned into joining the Washington-led nuclear lynch mob against Iran," The Hindu, one of India's most influential newspapers, cautioned Thursday. "Aside from the lack of any legal basis for threatening Iran with sanctions, India should consider what the U.S. pressure on Tehran will do to international oil prices as well as to the overall security scenario in West Asia."

 

The United States and its allies are thought to have the majority behind them on any vote for referral. Still they would like to see India, China and Russia on board ? all three countries carry weight among other IAEA board nations, and Moscow and Beijing have a vote on the Security Council on what to do about Iran, once it is referred.

 

 

http://news.yahoo.com/s/ap/20060122/ap_on_..._the_oil_weapon

Makes no sense as 70% of US oil comes from places other than the Middle East.

Makes no sense as 70% of US oil comes from places other than the Middle East.

 

I think you have that backwards.

Makes no sense as 70% of US oil comes from places other than the Middle East.

 

I think you have that backwards.

 

 

No, he's basically correct. Actually, as of 2004 (I haven't seen the 2005 totals yet), the Middle East accounted roughly 24% of our imports - far less than the 32% we import from Canada and Mexico. Nonetheless, it's the price of oil world-wide that would be affected. What the article ignores is that production has been increasing in Iraq, and would increase throughout all producing counntries once the prices start to rise. On the other side, the article is also ignoring China's rapidly increasing thirst for oil, which the vast majority of analysts attribute to being the majority factor in upward pressure on oil prices. Yesterday, Saudi King Abdullah arrived in Beijing for meetings reguarding China's oil imports.

At this point, it doesn't sound like OPEC is going to be influenced by Iran to cut production any further than it would without the recent tensions. In the spring in the northern hemisphere, production is usually cut as demand lessens during the warmer weather for the bulk of the world's oil-consuming population. So, we can expect a cut in production, but probably nothing out of the ordinary.

 

Last Update: Sunday, January 22, 2006. 3:12pm (AEDT)

Iranian tensions may hit OPEC

 

OPEC, which is to set its production policy for the coming months at the end of January, risks being dragged into a conflict pitting Iran against Western oil consuming nations.

 

The Organisation of Petroleum Exporting Countries, which pumps about 40 per cent of the world's oil, is due to meet on January 31 in Vienna.

 

There it will decide whether or not it should cut its output in the second quarter, when demand usually eases as warmer weather comes in the northern hemisphere.

 

However, the decision will not be easy to take with oil prices only $US2 away on Friday from an all-time high of $US70 and amid uncertainty about global oil demand.

 

OPEC's task could be made all the more difficult as tensions between the West and Iran, the cartel's second-biggest producer, heat up over the Islamic republic's nuclear ambitions.

 

Iran has asked OPEC to reduce the cartel's oil production quota by 1 million barrels per day from April.

 

"OPEC should not postpone the issue of output reduction," Iran's OPEC representative Hossein Kazempour Ardebili said.

 

"Iran has called for carrying out discussions and making decisions for a 1 million bpd of oil output cut in the second quarter.

 

"If OPEC continues its current production, the [current] excess 2 million bpd of oil supply will lead to an excessive stockpile.

 

Mr Ardebili says the stockpile is not affect oil prices at the moment because demand is high.

 

"But in the second quarter, this heap of [oil] snow will fall down on the oil price as an avalanche," he added.

Sanctions decision

 

The remarks come as Western countries aim to gather support for referring Iran to the UN Security Council for possible sanctions.

 

The editor of industry journal Arab Oil and Gas, Francis Perrin, says Iran's call for an output cut "can be interpreted as a way to send a message to Western countries".

 

However, he says Iran would have no easy job convincing its partners in OPEC, which says it is an apolitical organisation, to go ahead with a production cut.

 

So far no other OPEC country has shown signs of taking the call seriously.

 

Algeria and Venezuela have openly said they were against a cut.

 

Nigeria and Indonesia have also given similar indications, according to the Paris-based International Energy Organisation.

 

The US has weighed in to urge other OPEC member states to make up for any shortfall if Iran stops pumping.

ABC News/Austrailia - the ABC New/US didn't carry this story

Makes no sense as 70% of US oil comes from places other than the Middle East.

 

the problem is that price for oil is set by open markets at the global level. So if Canada can sell a barrel of oil to France @ 100, they won't sell it to the US for 70

It looks like China will be doubling it's imports of Saudi oil withing two years. It will be interesting to see how this affect the rattling of sabres between China and Japan over Japan's drilling in the China sea (and China's attempts to economically isolate Japan by getting trade agreements with all its Asian neighbors).

 

Chinese-Saudi energy deal expected

By Chris Oliver, MarketWatch

Last Update: 6:34 AM ET Jan. 23, 2006

 

HONG KONG (MarketWatch) -- China and Saudi Arabia are expected to sign an energy-cooperation deal this week, marking a milestone in relations between the two nations as King Abdullah begins a three-day visit to Beijing.

 

The Saudi king, who arrived in Beijing Sunday, was due to meet Chinese President Hu Jintao on Monday.

 

China's Foreign Ministry said the two leaders would oversee the signing of several contracts, without specifying a date, according to a report from the Xinhua news agency.

 

The deal is likely to include a memorandum of understanding calling for increased bilateral cooperation and investment in oil, natural gas and minerals, according to a report in the Asian Wall Street Journal, which cited an unnamed Saudi official.

 

It's Abdullah's first official overseas visit since taking the throne in August. And the visit is the first by a Saudi ruler since the two countries established diplomatic relations in 1990.

 

Analysts said the meeting will likely address China's technical ability to handle increased imports of heavy and sour crude oil -- the two main types of petroleum that China exports from Saudi Arabia.

 

China's coastal refineries can only handle about 500,000 barrels of sour crude daily, not far above the 400,000 barrels of Saudi crude it now imports a day.

 

The deal comes as Saudi Arabia, the world's biggest oil supplier with the largest known reserves, seeks to diversify its economy and move away from too great a dependence on the United States, analysts said.

 

"In the coming years China will be the incremental buyer for Saudi crude along with India," said energy analyst Gordon Kwan, at Hong Kong brokerage CLSA. "So they want to make sure that Chinese refineries have the technology to process the type of crude oil that Saudi will be producing."

 

Abdullah's China visit is part of a four-nation Asian tour that will also include stops in India, Malaysia and Pakistan. Members of his delegation include Saudi Oil Minister Ali Naimi.

 

China's oil imports from Saudi Arabia have doubled in recent years from 12.5 million tons in 2002 to 22 million tons for the first 11 months of 2005. China's consumption, currently 7 million barrels per day, is growing at about 5% a year, spelling additional daily demand of 350,000 barrels.

 

Kwan estimates if China turned to Saudi Arabia for half its growing oil consumption, daily imports from the kingdom could double to 1 million barrels per day within two years, not far behind U.S. current daily imports of 1.2 million barrels per day.

 

"So even though in absolute size of purchase China is really only one-third that of the U.S., when it comes to incremental growth, China is a big player," Kwan says.

 

Analysts said the talks between the two leaders will also focus on terrorism and the potential for Chinese troops in Saudi Arabia.

 

Daniel Chan, chief investment strategist of DBS bank in Hong Kong, said in addition to crude oil, the talks will focus on boosting the import of refined oils in the form of diesels and other ready-to-use fuels.

 

"At this moment, I don't think there will be a specific deal," Chan said. "I think the important element is the commitment between the two governments. China has an interest in sourcing long-term oil reserves directly from the Middle East."

 

Chinese and Saudi oil companies have already signed several deals. China Petroleum & Chemical Corp., or Sinopec, is drilling for natural gas in Saudi Arabia.

 

Sinopec, China's second-biggest oil producer by volume, is also working with Saudi Aramco and Exxon Mobil to build a refinery in the southern province of Fujian. Aramco is also doing engineering work for another Sinopec refinery in China's northeast.

Market Watch