Business | Oil & Gas
US attack on Iran could 'superspike' oil prices
The prospect of Turkish tanks rolling into northern Iraq - current oil exports: virtually zero - was enough to send crude prices soaring. So what would happen if bombs started dropping on Iran, the world's fourth-largest exporter?
- Financial Times
- Published: 22:57 October 23, 2007
The prospect of Turkish tanks rolling into northern Iraq - current oil exports: virtually zero - was enough to send crude prices soaring. So what would happen if bombs started dropping on Iran, the world's fourth-largest exporter?
The debate in Washington remains unresolved but the US has clearly made preparations for a potential strike on Iran's nuclear programme. A wider attack on its oil facilities is highly unlikely, as is an Iranian response of cutting off supplies. Even if this occurred, Iran's net exports of 2.5 million barrels a day could, in theory, be covered by spare capacity in Saudi Arabia and the world's four billion barrels of commercial and strategic stocks.
More important would be Iran's military response - most likely, asymmetric retaliation against US interests. The possibilities, which include attacks on Saudi facilities handling one in 10 of the world's barrels, may read like the jottings of the "techno-thriller" writer Tom Clancy. But the vulnerability of the region's oil network is real enough.
The mere threat of such attacks would push oil beyond $100 a barrel. What then? Big economies have so far proved resilient to high oil prices. Yet falling oil demand in the US and efforts to run cars on hooch and chip-fat show high prices are biting.
Three-digit oil prices would accelerate this trend, particularly if they sparked a US recession. Economic expansion across the Middle East - an important region in terms of incremental oil demand growth, not just supply - would reverse. A short-term spike, therefore, could well be quickly followed by a sharp drop - as happened with oil after the 1991 Gulf war and with gas after 2005's hurricanes.
When high and volatile prices have savaged underlying demand, it does not bounce back with supply. Consumer behaviour and energy policies change. War in Iran would undoubtedly spark a "superspike" in oil prices. But for those looking for an investment angle, alternative energy looks a better bet.
Citic and Bear Stearns
An announcement from a US investment bank that does not feature mortgages is bound to be a relief. Bear Stearns' tie-up with Citic Securities seems to be a sensible step towards diversifying the US broker-dealer's business, so painfully caught out by the credit crunch in the third quarter.
Although small at $2 billion in total, the cross-shareholding, structured via convertible securities, has several positive effects for Bear. First, it minimises Bear's risks versus a straight equity position. Second, it reaffirms Bear's confidence in its balance sheet.
Still, the fact that Bear is taking this step underlines even more clearly that it is in no need of a capital infusion and investors can relax about the buy-back programme. The key benefit is the one that will take time to vindicate - that the deal will cement the relationship and produce tangible commercial benefits.
Certainly, investors should be pleased that Bear is building its international presence. It seems safe to assume that the Hong Kong-based joint venture, which will provide capital markets services such as international offerings of Chinese companies, will provide benefits to Bear fairly early on. Helping to develop financial products for distribution into China sounds mouthwatering, and vague in equal measure. That is inevitable. It is still worth getting excited about.
Pole shock
Call it a Pole shock. Poland's Law and Justice party was not exactly expected to prosper in parliamentary elections after the collapse of the ruling coalition it led. But the drubbing it received by the liberal Civic Platform party was severe enough to mark the end of Poland's flirtation with the nuttier flavours of nationalist politics. The era of friction with other European countries and alleged manipulation of the media and of public institutions including the central bank, appears to be over.
Whether the result will mean a sharp change in economic tack is less clear. On paper, Civic Platform is investor friendly. It supports fiscal reform, including the possible introduction of a flat tax system. It wants to restart privatisation in the power, airline and banking industries - although it will continue to regard gas distribution and oil as strategic.
And it is also positive about euro membership, probably after 2012. The last government was unenthusiastic.
Poland's convergence with the euro zone is priced in. Equities trade at a premium to western European valuations and long-term real interest rates are less than 80 basis points above euro levels. Indeed, on Monday in Warsaw, in spite of the election, equities fell in sympathy with world markets. While political observers might have doubted that Poland's destiny is in Europe's mainstream, financial markets did not.
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