Iran crisis: High oil prices can plague the global economy

By Rauf Naqishbendi: 

Due to the global economic slowdown, the demand for oil has been dwindling, resulting in an over-supply of oil. The supply-and-demand economic fundamental is seemingly imbalanced as the oil supply exceeds demand, and yet oil prices are on the rise. Conspicuously, this shows how geo-political events can override economic principles: in this case, fear of military confrontation with Iran is the culprit. The global economy is beset by a host of economic predicaments. Should the Iranian fear not be properly managed, further rises in oil prices can dampen the already fragile global economy, resulting in severe recession with precariously high inflation.

Since Iran’s launch of uranium enrichment, the fear that either the United States or Israel will strike at Iranian nuclear facilities has been headline news. There has been an on-going threat from both sides as Israel and the U.S. are not ruling out a military strike. Iran, in response, is threatening to close down the Strait of Hormuz, a vital oil transit point; roughly one-fifth of all the crude oil traded worldwide passes through this shipping channel.

The U.S. has been pressing the United Nations to impose severe economic sanctions on Iran to create hardships for the Iranians causing social unrest and resulting in regime change. However, this policy was tried with Saddam’s regime, North Korea, and Cuba but without producing the intended result.

The Iranian regime is zealously avenging itself against the U.S. for the inequities the U.S. inflicted upon Iran during the Shah’s regime – and they use their oil as a weapon. Iran has been instrumental in keeping oil prices above the fair market value. Whenever Ahmadinejad makes threats, the oil prices spike. The same occurred when Israeli leaders responded provocatively. Israelis didn’t gain from their threats other than opening their big mouth, but Iran and the rest of the oil-producing countries, Israel’s enemies, benefited greatly. This is a tell-tale sign of the Israeli leaders’ naivety in helping their enemies.

The consequences of the Iranian saga for the sides involved can be summarized as follows.

Iran:

Clearly Iran is cognizant of its inability to confront the U.S. militarily; therefore, Iranian intimidation regarding closing down the Strait of Hormuz is a nonsensical bluff, as the Iranian army is by no means a match for mighty American firepower. However, the new sanctions against Iran are pending. Once agreed upon by the European Union, they will have a devastating financial impact on Iran. On February 17, Bloomberg News reported, “Swift, the global bank-transfer messaging service, said it is prepared to impose sanctions against Iranian financial institutions once the European Union presents implementing rules on its restrictions. Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a Washington policy group, said, ‘If strictly implemented, this could deny Iran’s banks the ability to move billions of dollars in financial transactions, and put immense pressure on Iran’s leaders to reconsider their policies’”.

Iran’s isolation from global financial system:

This new sanction will mark the exclusion of Iran from the global banking system, leaving Iran with the ancient “barter” system, requiring Iran to exchange its oil for goods and services that willing parties have to offer. The only country to engage with Iran, once this sanction is executed, will be China. Optionally, Iran can take the proceeds for its oil in Chinese currency, but Chinese currency is not exchanged on the financial market; in so doing Iran can use the Chinese money it receives to trade with China only, which will meet little of Iran’s needs. In the final analysis, Iran should bow to international demand for it has not a viable alternative. Moreover, the Iranians will suffer greatly, as there will be a shortage of almost all type of goods and products that people have taken for granted.

United States military confrontation:

Given the U.S.’s past and recent foreign policy failures in the Middle East, the Obama administration will be at the helm restraining from military action unless it becomes an evil necessity. The recent U.S. invasion of Iraq and Afghanistan has caused America’s respectability to suffer in the Middle East. After that, the U.S. surely doesn’t need another blow to its image. In the meantime, should the U.S.’s threat against Iran continue, it will eventually cause a hike in oil prices to a point which would jeopardize the U.S. economic recovery. Then, the prospects for the Obama administration would need to be calculated.

Israel:

Unlike the U.S., Israel should have no concern about its reputation in the region, for Israel is despised by every country in the region. Furthermore, Israel has no diplomatic relationship with any Middle Eastern country except for a forced diplomatic relationship with Egypt and Jordan. Commerce-wise, Israel’s trade with almost all countries in the Islamic world is non-existent, except for Turkey, and that is nose-diving.

Overall, however, it must be realized that Israel striking at Iran will do no material good for Israel, and it will backfire by making the Iranian government more popular in the Islamic world and embolden Iran toward more future action against Israel. Should Israel strike Iran, it must bear the consequences because Iran has chemical and biological weapons and long-range missiles that can strike at the heart of Israel. Given what a small country Israel is, it wouldn’t take much to devastate it. Sure, Israel, in turn, can use its stockpile of nuclear weapons to devastate Iran, but it would do no good for Israel to destroy Iran should their own country be devastated. Regardless, should Israel be serious about their threats, they should act without holding the world hostage to exorbitant oil prices.

The oil-producing countries in the region are profiteering from higher oil prices, but the rest of the world cannot endure high oil prices for a protracted time. The Obama administration must acknowledge that the new sanctions on Iran may well take a long time to have their intended effect, if any. At the same time, should oil prices reach $150 per barrel, which is probable should this situation protract, then the already vulnerable global economy will most likely be plagued with a severe recession and a morass of high inflation.

Rauf Naqishbendi is a contributing columnist for Kurdistantribune.com, Kurdishaspect.com,  American Chronicle, Kurdishmedia.com(2003-2011), ekurd.net, ikjknews.com  and has written Op/Ed pages for the Los Angeles Times. His memoirs entitled “The Garden Of The Poets”, recently published. It reads as a novel depicting his experience and the subsequent 1988 bombing of his hometown with chemical and biological weapons by Saddam Hussein.  It is the story of his people´s suffering, and a sneak preview of their culture and history.  Rauf Naqishbendi is a software engineer in the San Francisco Bay Area.

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