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Editorial comment

The global economy seems to have reached another of those key impasse moments that we have witnessed so many times since the start of the financial crisis back in 2007. Once again, we appear to be critically balanced between, on the one hand, the first stirrings of a nascent economic recovery and on the other, the threat of an unforeseen and unique event leading to acute financial uncertainty and inevitably resulting in yet another false dawn. In 2011 we witnessed this on several occasions with such ‘unique’ events including the Arab Spring and the Japanese tsunami. In both cases, the resulting oil price spikes effectively sidetracked any fledgling global economic recovery.

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Now in 2012, with the US economy starting to exhibit genuine signs of a recovery and even the Eurozone beginning to come to grips with its banking crisis, events in Iran are putting this recovery in jeopardy. Tensions caused by Tehran’s nuclear ambitions have led to the impending imposition of oil export sanctions on Iran by the US and the European Union as well as an anticipated reduction of Iranian imports by countries such as China and India. The compliance of China and India is of particular note as at 540 000 bpd and 328 000 bpd respectively, these counties represent the first and third largest importers of Iranian crude. Oil prices at the time of writing have already increased to US$ 124/bbl. up from US$ 108 in January. In Sterling terms, and very nearly in Euros, this is the highest price level ever witnessed for crude oil, exceeding that of July 2008. This price spike cannot all be attributable to the Iran issue, coming as it does on the back of extremely harsh weather conditions throughout Europe as well as the aforementioned ‘unique’ events of 2011. However, with overall global demand increasing, the removal of Iranian crude places additional stresses on an already tight oil market.

As ever, the world will be looking to Saudi Arabia, the big swing producer to plug the gap in global supply. Whilst in previous years the kingdom has been well placed to make up the shortfall, there is intense speculation that it will struggle to build significantly on the 9.9 million bpd, that according to the IEA, it was already pumping in January to offset existing supply disruptions in South Sudan and Libya. With analysts predicting the need for Saudi to produce at least 11 million bpd to make up for the Iranian shortfall, the market will be stretched extremely thin with very little capacity remaining should further supply outages occur elsewhere in the world. With the system creaking to this extent, the result can only be the prospect of further increases in crude prices to levels unsustainable for economic growth. Ed Morse, Global Head of Commodities Research at Citi, writing in the Financial Times stresses that, “US$ 150 oil would be enough to cut US growth by 2 percentage points, pushing the country into recession”. Perhaps this is overly pessimistic and the US will be strong enough to resist slipping back into recession in the face of such increases in oil prices, but until the situation is resolved in Iran and elsewhere, and prices brought back into check, the global economy will still remain extremely vulnerable to the ebb and flow of world events, which are always unpredictable – this much we know for certain.

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