What If Iran Closed the Hormuz Straits ?

Jimmy Carter asked himself the same question 32 years ago and committed political suicide straight after - but had the time to install solar collectors on the White House roof, in winter, before handing over to president Ronald Reagan. Today, if Iran closed the Straits - possibly for a day but war action would rapidly open it again - this would give oil traders the signal to make oil prices pop by $30 or $40 a barrel in a spike that could fold down fast. More real-world credible, Iran may cut crude oil exports to Europe in response to embargo action by European states in the next 3 - 6 months, and this can have a longer-term, slower upward impact on prices. The impact would especially focus Europe, and continue widening the Brent premium against WTI which already jumped 46 percent in January.

Not only due to Iran and geopolitics, the premium could go beyond $30 per barrel.

This already moves oil price forecasting into no direction land. Like we know, Goldman Sachs sees oil prices in 2012 at $126.50 for WTI and $130 for Brent, with almost no mention of Iran and almost no remaining Brent premium.

WHAT IS THE ECONOMIC TIPPING POINT FOR OIL ?

The real fundamentals on oil prices are economic. Iranian action on the Hormuz Straits would need to keep it closed at least 4 to 5 days for double-digit oil price gains to build, one after the other, possibly levering the WTI price to $180 for Nymex trading, and $200+ for Brent in ICE trading in Europe, but the bottom line is this would be a self-shrinking spike, and the story would unravel differently on each side of the Atlantic, because energy prices are so radically different, each side.

On the US retail gasoline market, prices could be pushed to the 'magic level' of $6 for a US gallon. This could quickly shrink gasoline demand, refinery runs, and send inventories up.

With the euro at a current value of $1.38, 6-dollar gasoline means gasoline prices around 1.19 euro per litre but this needs comparing with the Eurozone and UK average price, expressed in euro, of around 1.60 euro per litre today 10 February 2012. With the Straits of Hormuz wide open for steaming !

Put another way, European filling station pump prices are at this very moment around $262 per barrel. To be sure, there are street riots in Greece - but these aren't driven by gasoline prices. Also to be sure, car sales are down in Europe but high fuel prices are not the driver - which is less credit and disposable income, and fear of unemployment haunting would-be drivers of new cars in Europe.

High oil prices fell off the European radar screen, along with global warming, and other real world, real economy problems moved up the menu. One of these is global economic slowdown, even affecting China and India. This quickly translates to rising oil inventories as world oil demand straightlines due to outright recession in Europe and the weakest-possible, near jobless recovery in the US. Due to this, as IEA and US EIA outlooks suggest, world oil demand growth could in fact be running well below 0.5%/year. In turn, this can or should shrink any major oil spike driven by Iran crisis.

WHAT KEEPS OIL PRICES HIGH?

A widened and 'unreal' Brent premium is already one major support. Linked to this, which draws on the euro's high and unjustified value, US Federal Reserve easing can only push down the world value of the dollar, shown any day the greenback falls against what should be called the loonie but isnt - the euro. Oil prices can and will rise in dollars, especially in Europe but in real value terms they are in straightline or very slow growth mode.

Why oil prices are so high in Europe, and can go higher, neither start or finish with European political action to follow the US and embargo Iranian oil imports - despite these being a double-digit percentage of imports for several EU countries including Italy, Spain and Greece, who really do have other, more pressing debt-deficit problems to deal with. European refining, for example, is a disaster zone hit by everything from the wrong balance of product outputs, still loaded to gasoline despite over 75% of new cars sold in many major markets being diesel-fuelled, to new environmental, health and safety regulations, and carbon reduction commitments adding ever more lead balloons to the cost side.

Europe in fact shows the US and its other competitor trade partners how uncontrolled energy price rises with a heavy oil-indexed flavour help tip the scales into economic stagnation and recession. And do not lever down energy prices. What we can say is the energy tipping point has already been attained, but Europe's economic mess is so multi-stage the economic tipping point is not yet in sight.

OIL INDEXED GAS - AND COAL

Also today 10 Feb 2012, the US Henry Hub price for natural gas hovers round $2.50 per million BTU, but in Europe, helped by extreme cold weather and Gazprom needing to ship more gas to markets nearer home inside Russia and east Europe, and burning more gas to pump the stuff west along its massive and leaking gas grids, gas prices are close to $11.50 per MMBTU on average.

To get the unreality of this we have to add these prices have been declining for some while - and only kicked up again with the extreme cold which has so far killed more than 500 persons across Europe.

Stern defenders of low cost nuclear power, like France's probably outgoing president Sarkozy who rubs shoulders with total nuclear exit Chancellor Merkel of Germany, have together decided that shale and coalseam gas extraction are a threat to planetary survival, and must be banned, at least in Europe. Simply due to this, Poland is likely to be the first EU country to quit the European low carbon energy transition plan, called the climate-energy package.

One direct result is growing imports of Qatari LNG at up to $15 per MMBTU in cryogenic tanker ships boiling off as much as 1% of their total cargo weight of gas every day they sail. How much greenhouse gas CH4 this emits does not feature anywhere on nighttime TV interviews by the Sarkozy-Merkel duo, defending the planet while they save European finances. At $15 per MMBTU, this gas is equivalent to oil energy at $87 per barrel - which for European leaders is dirt cheap oil, even if it isn't for European consumers, business and industry !

With no surprise, global coal exporters supplying Europe are doing what they can to oil index their Black Gold: European coal import prices are now close to 90 euro per ton (not $90 per ton), and this in a global macro context where coal prices have been slipping for months as recession trims the iron and steel industry's coal needs, only amortized by China's rising import demand for coal. When used in Europe for electricity production, coal energy is the No. 1 target for mandatory carbon and emissions reduction commitments and trading, further raising the effective per-ton price in Europe to over 120 euro per ton, reflected in "dark spreads" for power and emissions traders. These in turn drive speculative positions, and forward prices on the South African and AP12/14 coal swaps market.

Understanding Europe's self-imposed energy endgame is also helped by a look at offshore windfarms and onshore solar power plants producing power at unit kWh prices as high as 15 - 20 euro cents. Related to oil energy, this is the same as oil at $320 per barrel, making sure that future European domestic, commercial and industrial electricity demand has serious threats to any growth - and highly possible declines in national and contient-wide demand.

The bottom line is that if Iran closed the Straits, this doesn't really matter to Europe's current elite deciders, because they set a context of extreme highenergy prices. Gasoline prices of $6 a US gallon came to Europe an awful long time ago.