Political  Calculations

Here though, we'll use the CIA's current estimate for world oil production in 2010 of 89,346,535 barrels per day, the most recent year for which the data is available (even going by the Energy Information Administration's world data, which as of 12 January 2012, only covers 10 months of 2010.)

The CIA's data indicate that Iran, the fourth largest producer of oil in 2010, produced 4,252,000 barrels per day that year. If sanctions imposed by Western nations only affect 25% of Iran's production, then the effect would be to reduce the daily supply of oil to the world by 1,063,000 barrels per day.

Because most of the oil that would be affected by sanctions upon Iran would be shipped to Europe, we'll use the average January 2012 spot price of $110.69 per barrel for Brent crude oil in Europe as our price reference.

The results may be found by running our tool found here.

As always, you're more than welcome to update our tool with more recent data or to consider other assumptions or scenarios!

Using our tool, we would anticipate that the price of Brent crude oil in Europe would rise by $4.39 per barrel, from $110.69 in January 2012 to $115.08 as a result of Iranian oil being embargoed by Western nations, if not offset by increases in the oil production of other nations. Such as the United States, which is experiencing somewhat of a boom in new oil production.

If Iran's oil production were completely shut off from the world, and no other oil producers adjusted their supplies to compensate, the effect upon European oil prices would be to increase the cost of each barrel of Brent crude oil by by $17.39.

So all in all, we find that John Iacovelli's math appears to be largely on target, as the results are consistent with what we find using slightly different assumptions about the elasticity of oil supply and demand. 

Political Calculations

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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