Thursday, January 05, 2012

A mutual suicide pact?

Following in the footsteps of the US government, EU member states are now edging towards an oil embargo on Iran, ostensibly in response to the Islamic state's refusal to abandon its nuclear weapons programme.

There is, however, more to this than meets the eye. Although attempts to get an embargo underway were tried last month, these were blocked by Greece, Iran's biggest European customer, which buys up to 35 percent of its crude oil from that source.

Previous suppliers of crude, Russia, Azerbaijan and Kazakhstan, have stopped trading with Greece as a precautionary measures in case Greece defaults. But without the 450,000 barrels of oil per day Iran now supplies to the Greeks – and the Italians and Spanish – these countries are in serious trouble.

But it is not just oil that is the issue. It is claimed that cash-strapped Greece has also been reliant on the Iranians for credit, as the only crude oil supplier that would afford them the facility. Although this has been denied by Tehran, the embargo will nevertheless have a particularly damaging effect on the Greek economy.

If we are now seeing Greece relaxing its opposition to the embargo, then – in the nature of European politics – there must be a price. So far no one is even hinting that this is the case, much less being specific about what it is, but it is inconceivable that Greece would be so obliging out of the goodness of its heart.

But Greece is not alone in anticipating economic damage. With the Iranain oil off the market, and its government threatening to close the Strait of Hormuz, oil prices have been rising, even if they are now steady.

Some 20 percent of world production is run through the Strait and the loss of ten million barrels a day of Middle East production could drive short-run oil prices to $413 a barrel, given the inability of consumers to rapidly shift to other fuels. And if that kind of shock is enough to drive the US economy back into recession, the effect on more fragile European economies could be even more severe, with Greece first in the firing line.

Thus, whatever economic stresses have existed in Greece, they are about to get worse, while EU members states' capacities to launch expensive bail-outs will be significantly reduced. None of the Europeans, therefore, can afford these demonstrations of power politics, especially as Iran tends to be relatively immune to sanctions.

For them to take such a serious hit, the EU member states must therefore be running to an agenda, the nature of which has yet to be fully disclosed. One could speculate that their action is the price demanded by the US for economic support, except that the US is in no better position to ride out the storm.

We may know more of the overall agenda by the 30 January though, when the foreign ministers of the EU member states meet to confirm (or otherwise) an embargo. But that is more than three weeks away, and never has a week in politics been longer.

By then, the global economy could be even closer to the precipice, making one wonder whether we are not looking at a mutual suicide pact. We have so few problems that we can so easily decide to create more?