By Dennis Morrison, Jamaica Gleaner - Contributor:

The spectre of military confrontation over Iran's nuclear development pro-gramme, and that country's threat to cut the flow of oil to six European nations, has reignited memories of the 1973 and 1979 oil price shocks that destabilised the world economy.

In 1973, it was the Arab-Israeli war and the resulting oil embargo that led to the spike in prices that triggered a recession. The era of cheap oil that had powered the post-World War II economic boom came to an end.

The 1979 political revolution in Iran, then OPEC's oil-producing member, brought another round of dislocation and skyrocketing prices. As the mullahs took power in Tehran under the Islamic government and Ayatollah Kho-meini made pronouncements, oil and financial markets shook. High oil prices fuelled inflation and the world eventually entered deep recession that lasted into the early 1980s.

In Jamaica, our economy was shaken to its very foundations, with our import substitution-based manufacturing sector and bauxite industry having been established on the basis of cheap oil. As the wrangling over Iran's nuclear programme heats up with the risk of conflict increasing, the obvious concern is whether we are likely to be hit by another massive escalation in oil prices. By some reckoning, a confrontation leading to disruption to shipping in the Strait of Hormuz, the strategic waterway for Middle East oil, could push the fuel to US$150 per barrel.

Catastrophic

With high oil prices already exerting such great pressure on the Jamaican economy, another oil-price shock would be catastrophic. While Iran's threat to cut the flow of oil has added to jitters in the market and pushed up prices by US$5-US$10 per barrel, changes in the political configuration since the 1970s have reduced the chances of a price shock of the scale of the earlier periods. A major change is the emergence of the Russian oil industry as the world's largest producer and a giant exporter.

The break-up of the Soviet Union and the dissipation of the East-West ideological conflict have opened up trade and economic relations, with Russia now supplying oil and gas across Europe to China, Japan, South Korea, and even to the western part of the United States (US). In fact, the grade of Russia's main export oil is similar to that supplied by Iran to the six European countries that it is now threatening with embargo. The limiting factors, however, would be the extent to which Russia could suddenly increase its oil exports, and the duration of a conflict with Iran.

Government overthrow

The tensions between the West and Iran go back into the history of Anglo-American domination of its oil reserves and in-terference in its politics. The British and the Americans punished Iran for collaboration with the Nazis in the early 1940s, and orchestrated the overthrow of the nationalist Mossadeq government of the early 1950s that sought to take control of the oil industry. The Shah was then installed as head of a pro-Western regime that lasted till the Revolution in 1979.

Under his despotic rule, Western oil multinationals ['The Seven Sisters'] regained control of Iran's oil supplies with powerful US backing. The Opposition to the Shah grew as repression intensified, and was eventually manifested in a radical Islamic fundamentalism that was virulently anti-American. As the Shah was overthrown, hostility deepened, leading to the hostage crisis and 30 years of ongoing conflict between Iran and the West, particularly the US.

First, there was the hostage crisis to which the US retaliated by imposing economic sanctions. Then US support for Iraq in its invasion of Iran, and the war deepened the tensions. In recent years, Iran has actively supported radical Islamist groups across the Middle East and is seen as a threat to pro-Western regimes in Saudi Arabia and other Gulf states.

The conflict has now turned to Iran's nuclear programme, the heightened fear of it developing nuclear capabilities and opposition to its political system. While Iran continues to deny that it intends to militarise the programme, United Nations inspectors insist otherwise. With tough, new economic sanctions being imposed by the UN, and Israel's aggressive stance, the risk of a showdown has escalated.

It is the Israeli threat of pre-emptive military action against Iran's nuclear facilities, however, that carries the greatest risk of causing dislocation. Ironically, there is a strong view that the impact of the tightened economic sanctions may be so severe that Iran is more likely than before to seek a negotiated settlement of the issue.

Dennis Morrison is an economist. Email feedback to: columns@gleanerjm.com.

February 19, 2012

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