Early Monday morning, June 22, I received an email containing words that I dreaded to read… ‘Universal Strikes planned for tomorrow’.
The oil industry was not ready for the downfall of the Shah, and by the time it had taken cover by purchasing available barrels from other parts of the world, a new record price had been paid, some 43$/barrel, a record that held until recently.
Strikes called for by the Ayatollah Khomeni had affected Iranian production and exports for some 3 months, as well as virtually shutting down the government and the Central Bank. Iranian oil afloat was not paid for, as President Carter created sanctions that forbade US companies from remittances to the Iranian Government which had the unintended consequence of giving companies such as Ashland a free loan of some 600 million dollars for an extended amount of time.
During the period after the recent elections I have read well over 500 messages in various electronic formats, but only early this morning have I seen the concept raised that the country and not just Tehran might be impacted by disorder.
In 1979 there was only an early form of the oil futures markets that we now take for granted. Nymex had begun a heating oil contract with some limited success, and a 6 oil contract – bunker fuel – which quietly passed away. The IPE in London was to begin their gasoil futures contract on the 6th of April 1981.
Iran was at the time of the revolution the largest Persian Gulf producer at around 5 million barrels a day, more than Saudia Arabia, and – as befitted its size – caused a greater oil shock than the one of 1974-75.
There are some major differences with the World today as opposed to the oil shocks of the mid and late 70’s. We are in the midst of a global recession, not one that has been created by a sharp increase in the price of oil.
According to statistics prepared by the Energy Intelligence Group global supply has been running ahead of global demand since March 2007. Over the first five months of 2009 supply exceeded demand by 1.7 million barrels per day, a direct consequence of the global recession.
Thus if Iranian exports are withheld from the market, there might well not be a price spike of a similar magnitude to the one caused by the major oil companies and a handful of traders after the downfall of the Shah.
We shall see.