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Hamilton: Implications of Iranian oil embargo

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From Professor Hamilton at Econbrowser: Iranian oil embargo

The most likely outcome of an embargo on oil purchased from Iran is that the countries participating in the embargo buy less oil from Iran while other countries not participating in the embargo [buy] more oil from Iran ([1], [2]). While this would produce some dislocations, if total world oil production doesn’t change, it would have little effect on either Iran or oil-consuming countries, and would basically be a symbolic gesture.

If instead the embargo is successful in reducing the total amount of oil sold by Iran, then the shortfall for global consumers would have to be met by some combination of increased production elsewhere and oil price increases sufficient to bring down global petroleum demand.

As for the first possibility, there appears to be only a limited amount of excess oil-producing capacity at the moment, and certainly far short of the 4.3 million barrels per day that Iran produced in the first three quarters of 2011.

And for the second possibility, it is useful to draw a comparison with previous episodes in which geopolitical events led to production shortfalls from key producing areas.

Hamilton provides a summary of world oil production and prices following previous events.

At their peak disruptions, these events took out 4-7% of net world production and were associated with oil price increases of 25-70%.

Oil prices are already very high; currently Brent Crude futures are at 0.44 per barrel, and WTI is at .70 per barrel. There is much more Hamilton’s post.

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