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PREMIUM FEATURES:

An Iranian standoff

Friday, 20 January 201 2

James McGrath

ALL eyes will be on Europe on Monday, as EU

leaders decide whether to slap sanctions on

Iran in a move over its nuclear program that

could potentially choke world oil supply but be

a boon for Australia.

By all reports, the question of whether or not to stopbuying Iranian oil has more or less been resolved,with the remaining wrangling centring on whetherthere should be a three month or six month lead-inperiod to allow member states such as Spain, Italy

and Greece to source a different supply.

The EU takes in about 450,000 barrels of I ranian oilper day, which makes it a key market for Tehranalongside China.

According to EU stats, 34.2% of Greeces total oilimports, 14.9% of Spains, and 12.4% of Italysimports came from Iran during the first nine monthsof last year.

The scramble then, to source new sources of oil,shapes as v itally important for the fragile memberstates.

The threat of sanctions from Europe, talk from Japanabout cutting its reliance on Iranian oil, the USthreatening to pass into law a bill which would punishthose doing business with Irans central bank, and thereported assassination of an Iranian nuclear scientisthave led to threats from Tehran to blockade the Strait

of Hormuz.

The Strait is of vital strategic importance as 20% ofthe world oil supply flow through the nar row shippinglane, and even mere threats from Tehran have sentthe price of oil upward in recent weeks.

According to a US Energy Information Administrationanalysis a $20 increase in the price oil could take 0.4points off its gross domestic product growth in thefirst year alone and increase unemployment by 0.1percentage points.

The effects may not be so immediate though, asJames Hamilton from the University of Ca lifornia haspointed out recently.

He said the effect of an oil spike, however temporary,could flow on for several quarters as a resultingslowdown in consumer spending takes some time toripple through the economy.

The threat has even drawn dire predictions from oilgiants.

If the Straits of Hormuz close, oil will rise above$200 per barrel, Breitling Oil and Gas chief executiveChris Faulkner was rece ntly quoted by TheWashington Postas saying. Its the one bottleneckthat allows Iran to choke the Wests oil supply.

Its worth noting that Breitling has large swathes ofland over oil-shale areas in the US, with hiscomments more than likely aimed at demonstratingthe importance of developing the shale industry in theUS.

Still, the potential for the closure of Hormuz to wreakhavoc in Europe and the US is very rea l, and theworld has been trying to find away by bypass theStrait altogether.

Saudi Arabia has offered to boost its production,

drawing threats from Tehran, while the In ternationalEnergy Agency has made similar overtures.

The impact of a blockade could be lessened furtherby regional moves , with the Habshan pipeline fromAbu Dhabi in the United Arab Emirates to Fujairah onthe coast said to be completed in six months.

This would, in effect, create about 4 million barrelsper day which could bypass Hormuz, although this is

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a rea vey sma gure compare o s o oflowing through the Strait.

The stakes will be pretty high when EU leaders meeton Monday.

Of course, thats assuming Tehran would followthrough on its threat rather than just talking tough.

Leighton Luke from Perth-based strategic think-tankFuture Directions said the noises from Iran weresimply that, and nothing more as the likely result of aMexican standoff is Iran shooting itself in the foot.

Id think it would be quite correct to say that Iranhas more to lose here. Being an oil [exporter] itselfand with a weakening economy, to a very large

extent the threats are more about playing to adomestic audience in Iran, he toldEnergyNewsPremium

Iran has to look tough, and has to be seen to bestanding up to the West. At the end of the day, itwould be very much a double edged sword.

I think this is simply more sabre-rattling fromTehran. Its louder sabre-rattling, but sabre-rattlingnonetheless. As I sa id, I think its primarily for adomestic audience.

Geopolitics aside, it is worth investigating theramifications the closure could have on the Australianmarket, however insulated we may be.

According to Luke, the impact on Australia is largelytied to the havoc which could be caused on worldmarkets rather than any oil supply issues.

What we get from the Middle East comes from the

UAE, and that transhipped through Singapore butotherwise the oil is coming from the likes ofMalayasia, Indonesia and Vie tnam. So were quiteinsulated in those terms, he said.

However, across the ditch from Iran lies Australiaschief LNG rival in Qatar. A closure of the Strait ofHormuz would leave them isolated from lucrativeAsian markets.

Qatar would be effectively shut off. But of course toadd to that, theres the consideration that long termcontracts are in place so that does restrict the abilityof Australian exporters to offer LNG onto the spotmarket, Luke said.

But as new projects come on stream and long termcontracts may not be in place yet, theres anopportunity there.

Parallels can certainly be drawn between a prolongedclosure of the Strait of Hormuz and the effect theFukushima nuclear incident had in bo lstering theattractiveness o f Australian LNG.

Just the mere threat of a closure from Iran wasenough to push the price of LNG up, Luke said.

I would think that a prolonged closure, if it were tohappen, you could draw the conc lusion that it couldadd impetus for the search for alternative energysources and that would be a boost for AustralianLNG.

Japan has yet to agree to cut Iranian oil importsthough, and while under pressure from US envoyswhich have included US Treasury Secretary TimothyGeithner, it is thought to be taking a pragmatic line.

So while all eyes will turn to Europe on Monday, thosewith an interest in Australian LNG will be keeping tabs

on Japan over the next few weeks to see how it allplays out.

Click here to read the rest of today's newsstories.

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