What Would Happen to Oil Prices if Israel Were to Bomb Iranian Nuclear Facilities?

Because sanctions are unlikely to curb the Iran’s nuclear ambitions, we now believe that there is at least a 50% probability of military action (most likely unilateral action by Israel) against Iranian nuclear sites over the next 12 months.

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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from <strong>Marshall Adkins’ (www.raymondjames.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Adkins goes on to say:

Iran’s Retaliatory Options

Iran has multiple retaliatory options at its disposal in the event of Israeli airstrikes. Which options would most adversely affect the price of oil? Ranked by their likely impact on the oil market (from least to greatest), they are as follows:

1. Iran cuts off oil exports and launches a wave of terrorism

It’s safe to say that Iran’s oil exports (currently about 2 MMbpd) would be immediately halted in the event of war. Even without a deliberate shutdown by Iran, pipelines would likely be damaged by bombing, and tankers would obviously not risk sailing into a war zone. Iranian-backed militias are ready to attack U.S. forces in Iraq and perhaps other Arab countries and would also utilize Hezbollah and Hamas to attack Israel directly. Terrorist attacks of this kind would not physically disrupt oil supply, but they would carry the risk of the conflict escalating, thus sharply widening the geopolitical risk premium in oil prices.

2. Iran mines the Strait of Hormuz

The Strait of Hormuz, the sole waterway out of the Persian Gulf, is just 45 kilometers wide and is the tanker route for not only Iran but also Iraq, Saudi Arabia, Qatar, and the United Arab Emirates. With each of two shipping lanes just 3.2 kilometers across, it would be quite simple for Iran to place hundreds of mines across the route, effectively bringing any shipments to a halt. This represents an immediate supply loss of roughly 15 MMbpd.

3. Iran destroys oil infrastructure around the Gulf

Remember the billowing smoke coming from Kuwaiti oilfields that Saddam Hussein’s army set on fire while retreating in 1991? Now picture this same scenario playing out again, except in every Arab country near the Persian Gulf. If you want to contemplate the nightmare scenario following airstrikes against Iran, this is it. . .Iran could retaliate by attacking producing fields, pipelines, shipping terminals, and other petroleum infrastructure across the region. The damage from such attacks could take years to repair. Some damage could well be permanent. In any case, the potential supply loss would be astronomical.

There are basically two roads ahead for the Iranian nuclear crisis.

1. The chances that Iran will travel down the road to a diplomatic solution are growing slimmer by the day, and last year’s revelations about the secret enrichment plant underscore this point.

2. The second road, the one Iran is currently on, leads to higher oil prices — potentially much higher.

Conclusion

For now the oil market is largely ignoring Iran but if war becomes inevitable then oil prices will go really high, really fast.

*http://seekingalpha.com/instablog/378432-bill-paul/30265-raymond-james-says-oil-markets-ignoring-big-iranian-war-risk

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.