John Iacovelli recently ran some "back of the envelope" calculations on the potential impact of Western country sanctions on Iran upon world oil prices. He estimated:
The U.S. Energy Information Administration in its latest tables stated that the Persian Gulf states produced 23,714 thousand barrels per day of crude as of October 2011, which we'll round to 23.7 million.
At the current time, Saudi Arabia is already producing more than usual to make up for the drop in Libya oil production. Let us arbitrarily state, then, that the other Gulf states will make up no more than 20% of the shortfall in Iranian production; thus, the calculation would be as follows:
- 23.7 million, total Gulf production
- minus .8 million (loss of 1 million Iran, plus .2 additional additional from Saudi Arabia and/or others)
- equals 22.9 million as the new production level.
- .8 divided by 23.7 equals a percentage drop of 3 and 1/3 percent. (-0.033)
Taking our PED formula and the Wikipedia coefficient for world oil, then:
- -.4 times -.033 = +1.33 percent change in the price of Persian crude, based upon the drop in supply.
The January 2012 price of Dubai crude (the benchmark for the region) is $110. Adding 1 1/3% puts the new price at $113.63.
I'm neither a mathematician nor an expert in oil pricing, and so would love to hear from anyone who has experience in the subject regarding this exercise. I know enough to know that my calculations could be hysterically off the mark.
But are they hysterically off the mark? To find out, we'll adapt a tool we originally developed in November 2011 to estimate what the impact would be upon world oil prices if the United States increased its production of oil by 25%.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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