Analysis: Uncertainty, not supply issues, keeps oil price high

By MARK HIGGINSON
Published on 21/02/2012 00:26

THE current spike in the oil price and its knock-on effect on domestic fuel costs is almost entirely down to the uncertainty caused by the Iranian crisis rather than crude oil supply issues.

Hardly any of Iran’s crude oil comes anywhere near the UK, so its embargo is having hardly any impact at all on supply. In fact, Iran’s problem is that its production is not being taken up by some of its normal sources in Europe, so it is actually trying to sell more of it to emerging markets such as India and China – with limited success.

To add to that, Saudi Arabia has guaranteed it will increase production to make up any shortfall in crude oil supplies, which means there is no danger at the moment of there being a shortage.

What we have in this situation is a problem of uncertainty and the market does not like uncertainty. The main issue is the threat of action by either the United States or Israel against Iran if concerns increase over its nuclear programme. If this were to happen it would have an impact on oil production and supply, because it would disrupt the whole region and the Straits of Hormuz would be closed to shipping.

However, the situation is similar to that of Greece defaulting, in the sense that it is the threat more than the reality that is having a destabilising effect.

When that happens and there is a high degree of speculation, the arbritage people in the markets make money from the price fluctuations, which increases the jump in oil prices.

It is hard to see this current price hike being anything but short-term and the price of crude will come down again.

However, it is also hard to see the Iranian situation being resolved properly in the short term, because Tehran looks set to push on with its nuclear programme.

This means the short-term effect could be extended, especially if, as the Foreign Secretary William Hague has described, we end up in a Cold War sitution.

While other parts of the region, such as Syria, are causing problems and this is obviously not good news for the markets, none has the same effect as the Iran crisis.

• Mark Higginson is a senior partner for PriceWaterhouseCooper in Aberdeen.

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