As some of you may know, I was a senior international oil market analyst and Middle East expert at the US Energy Information Administration for about 17 years. In March, I left that job to pursue other opportunities, including energy consulting, plus intensive involvement in "grassroots" politics and blogging. Still, I follow world oil markets closely, and it's certainly never a dull moment these days. Yesterday, for instance, Iran's supreme religious leader, Ayatollah Ali Khamenei, warned that Persian Gulf oil exports - as high as 17 million barrels per day - would be disrupted if the United States made a "wrong move" regarding Iran's nuclear program. This comment followed a multilateral (US, China, Russia, France, Germany, UK) offer of a new incentive package for Iran if that country abandons its nuclear weapons development program. According to Secretary of State Condoleezza Rice, Iran must respond "within weeks" - not months or years - to this offer. Well, it looks like Iran HAS responded, but not in the way Rice was hoping.
No surpisingly, all this hawkish talk - combined with the start of the 2006 hurricane season - is driving up oil prices once again. In "overnight trading," light, sweet crude on the New York Mercantile Exchange (NYMEX) rose $1.51, reaching $73.84 per barrel, one of the highest prices ever in nominal terms. And there's really no end in sight to this situation, given continued strong demand from China and elsewhere, essentially no spare crude oil production in OPEC (wich last week decided to keep its production quotas flat for the time being), plus continued instability in places like Nigeria and Iraq.
Could Iran cut off oil shipments from the Strait of Hormuz? It's possible, at least for a short time. For starters, this is a very narrow Strait, with 2-mile wide channels for inbound and outbound tanker traffic, as well as a 2-mile wide buffer zone. Iran is just miles away. According to Tim Ripley, an analyst with Jane's Defence Weekly Magazine:
You don't actually need lots of weapons to close (the Strait of Hormuz), you just need lots of threats. You don't even have to sink a ship, you just have to double the insurance rates (for shipping) and it has a knock on effect on the price of oil.
While threats alone could raise insurance rates and deter tankers from entering the Persian Gulf, Iran also has "Revolutionary Guards missile units, strike aircraft, surface and underwater naval vessels, Chinese-supplied C-801 and C-802 anti-shipping missiles, mines, coastal artillery" and more.
Aside from shutting down the Strait of Hormuz, Iran could attempt to damage or destroy Saudi oil production facilities across the Gulf, using its "45 to 50 Shahab-3 and Shahab-4 missile," not to mention potential commando units or terrorist attacks, such as the attempted destruction by Al Qaeda of Saudi Arabia's critical Abqaiq oil processing facility back in February 2006.
What we're seeing with oil prices now is, aside from supply and demand fundamenatals, the impact of these concerns on oil traders and markets. With no slack it the sytem, the loss for even a short time of Persian Gulf oil could be utterly devastating. For instance, a sustained net oil supply disruption of 10 million barrels per day from the Persian Gulf could easily lead to a doubling in oil prices, to $140 or $150 per barrel.
Yes, motorists, that means $6-$7 per gallon gasoline. Far fetched? Perhaps it seems so, but remember, oil prices were under $20 per barrel in the months following 9/11, and under $30 per barrel immediately following the U.S. invasion of Iraq. Since then, prices have more than doubled, even though Iraqi production is running around 1.9 million barrels per day, about what it averaged in 2002, before the war.
The point is, world oil prices are being driven higher by a number of factors - world oil demand, limited world excess production capacity, geopolitical uncertainty and anxiety in places raning from Nigeria to Iran. These factors are not likely to reverse anytime soon, and could even worsen sharply in the event of a military clash with Iran - or even serious economic sanctions. Buckle your seatbelts, $100+ per barrel oil, the "super spike" that Goldman Sachs talked about a year ago, does not appear in the least bit far-fetched at this point.
Your article on oil reminds me of your previous critique of Hillary Clinton's ethanol plan. While I agree that her plan is flawed and probably shortsighted--if only because she lacks expertise in energy markets--I do believe that ethanol can be a *partial*, not *total* fix for our current transportation fuel nightmare.
Certainly, study after study has shown that corn-based ethanol
provides a very small net energy gain. Simply, there isn't as much sugar content for fermentation in the plant as there is for sugarcane or switchgrass. But alot of the results of these studies are skewed based on the particular methodology used in them.
Is it reasonable to assume that artificial fertilizer will always be used for the energy crops being studied? What about treated manure? Manure that's been processed by a digester and is thereby easier to take up by plants, producing less runoff? Also, what about using biodiesel instead of diesel in the trucks that ship the energy crop to the refinery and ship the ethanol to filling stations? Wouldn't that cut down on fossil fuel emissions and make the process greener?
In general, given the constraints you've observed about corn ethanol, I don't think it has a solid future. But what about switchgrass? Are you equally as pessimistic about its prospects? Switchgrass is a hardy crop that requires little fertilizer and provides much much more fuel per acre than corn.
Again, not a total solution, but a partial fix, IMO.