Elections in Iran: What It Means For Oil

Uncertainty about Iran's leadership might have had as much to do with the increase in crude oil prices over the last 4 months as anything else. Under a powerful attack from former President Rafsanjani, Mahmoud Ahmedinejad has been scrambling for his political life. The stakes are high for the entire developed world: Iran is the second largest oil producer in OPEC behind Saudi Arabia.

Iran is sporting inflation and unemployment rates that are in the teens. They need American refining technology to increase the efficiency within their oil industry. Such advances could increase their current output to 140% of current levels.

Record turnouts at the polls have made this the most watched Iranian TV since the US Hostage Crisis. Regardless of how it turns out, a new president will seem like a victory for the West and those who align themselves with Rafsanjani, who has a more moderate stance towards the West than his peers. Just the fact that Ahmedinejad has faced such as strong challenge is a signal that changes are ahead in Iran.

That can translate well to crude futures -- a market that speaks Farsi. Stable government regimes in the Middle East, especially ones that are becoming more moderate towards the US, can have a stabilizing effect long-term on crude oil prices.

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Comments

[Pye Ian - Huffpost Blogger]

Considering that energy pricing is still primarily a US Dollar denominated affair, with very powerful financial interests 'calibrating' said pricing regularly via their discrete interventions in NYMEX/ICE/COMEX and other relevant platforms, one could easily conclude that oil prices will be determined more by speculators taking advantage of geopolitical events rather than said events's own direct potential threats or opportunities for energy markets themselves.

I.E. We control the bank, and thus decide the price. Supply and demand are secondary factors.

[Michael Martin - Huffpost Blogger]

Thanks for commenting. Consider this from the Foundation for Economic Education in The Freeman, their magazine:

Derivatives Don't Cause Risks

This criticism reverses cause and effect. Increased risk caused the derivative, not the other way around. The increase in the numbers and types of derivatives was the predictable response to the increased risks caused by such things as the uncertain value of the dollar due to the inflation of the 1970s and ’80s, the volatility of prices of resources such as oil, and the move to floating exchange rates for foreign currencies. These risks were not caused by derivatives. Derivatives emerged as a way of reducing risks in the same way farmers and bakers reduce the cost of fluctuating wheat prices with futures contracts.

Blaming risks on derivatives is as silly as blaming diseases on doctors.

http://www.thefreemanonline.org/columns/speculation-and-risk/

[Pye Ian - Huffpost Blogger]

Michael,

The (notional) value of the global over-the-counter derivatives market had risen to $596 TRILLION by year end 2007. Who knows where it stands now.

Said derivatives pile is now at great risk of unravelling due to no viable bottom existing to continually deflating real estate prices. I.E. There is no real way to mitigate against the risk of an avalanching OTC market, as those who built the derivatives do not now have a way of diffusing said risks.

Language on such old models is itself dead as well.

[KillTheMessenger]

Yawn... yet another unproven and unprovable hypothesis about what drives oil prices up.

I stick with the simple facts: Americans will buy gas at $3 per gallon and they will buy almost as much gas at $4 per gallon. That's plenty to drive oil prices through the roof.

[Michael Martin - Huffpost Blogger]

Thanks for commenting. Here is something to consider from Wikipedia on Libya:

On May 15, 2006 the United States State Department announced it would fully restore diplomatic relations with Libya if it dismantled its weapons programs. The State Department also removed Libya from their state sponsored terrorism list which it had been on for 27 years. This move has also been attributed to the pressures of oil companies lobbying the Congress. In addition to that the fall of the Soviet power, the prominent role that Libya plays in the African Continent, and the assistance it could provide to the US in its war on terror are among the other considerations that were factored in.

Don't forget to cover your mouth when you yawn.