Analysis: Attacking Iran -- Part 1

By BEN LANDO, UPI Energy Correspondent   |   March 16, 2007 at 8:35 AM
WASHINGTON, March 16 (UPI) -- Uncertainties surrounding a potential attack on Iran are plentiful, especially whether the tension over its nuclear program will lead to violence. But the price of oil would likely skyrocket to record heights and the regional and global oil markets would have to hang on for the ride.

"If there's just an attack on nuclear facilities, and it's limited and Iran limits its response, even then I still think you're seeing oil probably at $80 (a barrel)," said Saad Rahim, manager of PFC Energy's country strategies group. Oil settled at around $61 Thursday.

"Now if you actually hit Iran's oil facilities and you take the 2 million barrels per day off the market right now, and especially if you get reverberations from the region, and you take another couple million barrels off the market because of that, then you easily see $100 (a barrel)," Rahim said.

"We are talking about a region where over a quarter of the world's oil comes out of," Rahim said. "This type of situation I think would be unparalleled even for that region in terms of its direct impact on the oil trade and flow."

The U.N. Security Council will soon take up new sanctions, aimed at forcing Iran to end the uranium enrichment program capable of fueling both nuclear power plants and weapons.

Iran says its nuclear program is for energy only, not a bomb. But international inspectors say Tehran doesn't provide enough information to qualify that claim. Iran and the United States say they want to negotiate, though shutting enrichment facilities is a U.S. prerequisite Tehran won't meet. Iran wants to be able to fuel its future nuclear power plants instead of relying on outside suppliers. But enrichment was a stealth program until 2002, which is why Iran's critics paint it with bomb motives.

The military option by the United States, Israel, and/or any coalition, has not been ruled out.

"A military action will have a military response," Iran's top negotiator, Ali Larijani, said Thursday.

Violence could surface either in conventional combat or via Iranian proxies around the region and world. People would die, both in and out of Iran; that's the only sure thing. As for the oil market, the only variable analysts and experts agree on is the price will increase.

"At least a month to several months, we'd see oil prices at unprecedented levels," said Cliff Kupchan, director of Europe & Eurasia for the business risk analyst Eurasia Group, "both because of likely disruption and because of geopolitical tremors."

Iran exports about 2.3 million of the 3.8 million bpd of crude it produces. "Iran is already facing some very serious challenges in addressing its oil production decline in many of its larger fields and participation from the international community will be instrumental to help offset this decline and develop new fields," said Colin Lothian, senior Middle East analyst at Wood Mackenzie. U.N. sanctions and the threat of attack hinder progress, he said.

"You would have to assume that all exports (of oil from Iran) would stop," said James Placke, senior associate for Cambridge Energy Research Associates, who says an attack would add $10 a barrel to the price pumped higher by the tension, talk of and lead up to war.

That would severely threaten Iran's budget, perhaps another prompt to look at its options for retaliating, none inconceivable and none guaranteed.

Of the 85.9 million bpd the world consumes, 15.5 million heads to market through the Straits of Hormuz, which Iran could attempt to choke. It has threatened to, and threats are enough to scare the oil market.

This would have a limited effect, since the U.S. military could clear the way for tankers in a matter of days, but it would force the global oil market to eat up more of its limited spare capacity, tightening the market and pressing prices.

Then there are Iran's neighbors. Shiites, or Muslims in general, anywhere could respond to a call to arms. Iraq could be deluged, adding untold numbers to the battlefield the U.S.-led coalition is struggling with already, and Iraq's fragile oil sector could be held hostage. That's another 2 million barrels a day taken out of the market.

"You could conceivably see, depending on the scope of the initial attack on Iran and what their capabilities are after the dust has settled, you could see them potentially going after installations in Qatar or the United Arab Emirates, or even Saudi Arabia," Rahim said. "And that would have a huge impact on global oil markets."

Kupchan said that would be likely only if those states assisted or didn't condemn an attack on Iran. But Iranian allies already on the outs with the United States and its allies -- like Hezbollah in Lebanon, Hamas in the Palestinian Authority, or cells hidden worldwide -- would likely react. Oil hit record levels this summer as those two actors battled Israel.


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(This is the first in a two-part series looking at the effects of an attack on Iran. Part 2 will look at the Iranian and global nuclear energy sector.)

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