Dire straits for Turkey’s economy
The 1973 oil embargo by members of the then-OAPEC has become so engraved in collective memory that we are reminded of its disastrous consequences every time there is diplomatic/political friction that involves the Middle East. It is as if our generation “wishes” to witness a similar embargo in a furtive desire to test the limits of our energy dependence!
Maybe because of that, the news Feb. 15 that Iran was halting oil exports to six EU members landed like a bombshell on newsrooms. Iran’s Oil Ministry denied the report minutes later, and the story was molded into something like the issuance of a “warning” that Iran’s oil exports would be cut “unless long-term deals are made and payments by the EU states guaranteed.”
The warning comes as the clock ticks toward the EU’s announced embargo on Iran oil, which takes effect July 1. This “grace period” aims to help EU members find alternative sources without disrupting the oil flow.
Nevertheless, the developments once again displayed that Iran, the world’s fifth-largest oil exporter, is in fact unwilling to cut sales to the EU, precisely because it needs the cash at a time when sanctions have started to bite into its economy. To boost that cash, it has been issuing oil warnings and organizing naval exercises at the Strait of Hormuz with success: Spot Brent crude was hovering above $118 per barrel yesterday. Compare that with $54 in February 2009.
The oil price game is a delicate one, however, as too high a price would hurt Iran’s friends and foes alike. But a severe disruption in supply is a real possibility, as Soozhana Choi of Deutsche Bank believes. “Not since the late 1970s/early 1980s has there been such a serious threat to oil supply,” Choi said in a recent note to investors. Choi’s pessimism mainly stems from Iran’s threat to shut the Strait of Hormuz, but she adds the ongoing problems in Iraq, Libya, Sudan, Nigeria, Syria and Yemen. According to a January statement from Damascus, Syrian oil production fell by 40 percent to 220,000 barrels per day. If Syria indeed becomes “Libya-ized” in a way that some very nearby governments seek, its small but psychologically important contribution to global oil output could be wiped out.
Undoubtedly, Hormuz tops the list of priorities, as about one-fifth of global oil supply passes through the strait. Hence the flurry of worrying military activity in and around Hormuz. The “bluff” nature of other moving parts in this tension could be debated, but Washington has definitely drawn its red line here.
A $10 hike in the price of a barrel of crude oil raises Turkish inflation by 0.4 percentage point, while also boosting the nation’s energy import bill by $4 billion. The Turkish Central Bank’s 2012 average oil price estimate stands at $110 per barrel. The economy management thus needs to do the math regarding the outcomes of a regional policy that helps to raise tensions, rather than ease them.