The Silver Lining of Europocalypse: No Oil Crisis

The euro zone's hardship might be the only thing keeping oil prices from soaring  

Reuters

By most assessments, the U.S. economy, after years of muddling through the aftermath of the Great Recession, is getting hotter. Not bonfire hot. Not Jeremy Lin hot. But warm, like an outdoor jacuzzi.

Just case you were starting to feel swept away with optimism, however, take a moment to look at the drama in the world oil market, where the cost of crude is being driven up by one potential global crisis, and being forced back down by another.

During the past several weeks, the price of Brent crude has marched above $120 a barrel, from an average of about $110 in January.* Analysts say we can largely thank the standoff between Iran and the west over Tehran's nuclear program.

The combination of American sanctions aimed at crippling Iran's ability to sell crude and a planned European embargo has oil traders worried about the stress on global supplies. Prices would be even higher, were it not for Europe's woes. As the Associated Press recently put it, the eurozone already has "one foot in recession," as its economy contracted during the last quarter of 2011. Meanwhile, the whole world is trying to figure out whether Greece and EU finance ministers will be able to agree on terms for a bailout.

Hence, the oil market has reached a precarious equilibrium. There is the Iran crisis pushing up oil prices. And there is Europe's looming recession pushing down prices. Individually, these problems pose a threat. Together, they counterbalance.

Something's got to give. Yesterday, we saw the volatility of the current situation when oil prices edged up on news that Iran was threatening to cut off oil shipments to six European countries before their official embargo is scheduled to start in July. This was not necessarily a serious threat, as Iran isn't in much of a position to be picking its customers these days (even China, its largest oil buyer, has been fighting it on prices). In terms of international relations, it was akin to shouting "You can't break up with me! I'm breaking up with you!" But it showed that with nothing but a press release, Tehran could almost instantaneously send prices up, and direct more money into their own pocketbook, a trick they'll probably try to repeat.

If Europe's situation resolves, and the continent only enters a minor recession, there won't be a significant check left on the price of crude. We'll find out if the world really has enough excess supply to cut Iran out of the picture without sending prices through the stratosphere.

Or, of course, Europe could turn into a horror show, in which case the price of oil would be the least of our problems.

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*The cost American crude oil, known as West Texas Intermediate, has been lower, because pipeline constraints have led to a glut of supply that can't be shipped onto the international market. But it's also been rising lately.

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