Friday, May 25, 2007

How to squeeze Iran...

Alright, you are George W Bush. And here are the facts...

1. Iran is acting up and defying your wish
2. We live in a hydrocarbon economy where oil drives everything
3. Iran exports crude oil but imports gasoline
4. Iran faces a poor economy with high unemployment and inflation
5. Iranian government subsidizes heavily the gasoline sold to the Iranian public
6. Iranian government fiscal position is poor

Now... What would you do as GWB to squeeze the Iranian government?

Have a show of naval force off the coast of Iran?

hahahahahha.. please...

This is what he is doing...

Have "more than usual" refinery outages in the US, so that crude demand falls. Leading to crude prices remaining flat (squeezing Iranian government income)

However, because less gasoline is produced in the US, it is now importing huge amounts of gasoline from overseas.

Resulting in global gasoline price rise.

Now, Iranian government subsidizes gasoline. Which means every litre of gasoline sold will result in a loss for the government. With gasoline prices rising, the only thing the Iranian can do is either absorb losses (increasing Iranian government spending), or raise prices at the pump (squeezing Iranian government's popular support)

no... rationing is ruled out.

They chose to raise prices by 25%, which still results in prices substantially lower than global prices.

And people there are pissed, because their wallets are squeezed.

Furthermore, the Iranian government in its desire to relieve the wallets of the people of Iran announced simultaneously that interest rates "has to be lowered" to 12% by diktat. Resulting in Iranian Banks Shares collapse.

Isn't it wonderful how you can destablize a foreign hostile regime just by offlining a few refineries in Texas? All the time enriching your friends in the oil business (ExxonMobil, Saudi Aramco, Singapore et al.) and squeezing every single oil/gasoline importing nation (ie. China)


  1. As a conspiratorialist I applaud your excellent thesis, but there are areas that I would like to beg to differ.

    . . . Have "more than usual" refinery outages in the US, so that crude demand falls. Leading to crude prices remaining flat (squeezing Iranian government income). . .

    By ' flat crude price' I think you are probably referring to the WTI (Western Texas Intermediate) which concerns more the local US market.

    Iran exports most of its crude to Asia and Europe which uses the Brent Crude as benchmark and at present the Brent Crude/WTI spead is at record high levels. So Iran is still riding high on the rising international oil prices.

    In fact, there are already voices in the oil industry saying that the WTI benchmark is now a broken brench, because it dissociates so much from the Brent Crude Benchmark which account for 60% of the world market.

    And Iran is now selling 70% of its oil in Euros, up from 60% in past few months.

    So the 'intentional supression of crude price with raising of gasoline prices to harm Iran' thesis doesn't seem to work out too well against Iran , especially now the US drivers are themselves suffering from record high pump prices.

    Despite being a conspiratorialist, I see no special reason for the recent refinery outages to be intentional. The last US oil refinery was built in 1976, meaning that every refinery in the US is at least 30 years old ! They did break down in the past, but in those good old days when the supply/demand curve was not so tight, any outages were quickly compensated by other refineries and went unnoticed.

    With the recent peaking of light sweet crude oil, more and more refineries have to resort to using heavy sour crude oil , which requires higher temperature and pressure to distill, thus putting a lot of stress on these aged refineries which were not orginally designed for this purpose. So they break down.

    Wait until the hurricane season to commence shortly, and we may see the prefect storm in oil prices.

  2. hahahahahaha

    finally someone comments on this thesis of mine!!!

    Yes. The flat oil price is refering to the WTIC. And I think it is flat exactly because it is not exported and refinery outages in the US has pushed down demand.

    I agree with the Brent/WTIC breakdown. WTIC has always commanded a premium and now it is the other way round.

    So Iran's income MIGHT be ok. (Which I think they are not)

    Anyhow, back to Iran. Which currency it sells into has no relevance. Because they can sell in USD and turn it immediately into Euros. No matter how big the oil market is each day, it is dwarfed by the currecny markets.

    It is only a big deal if Iran sells in euros and keeps it that away. So I assume you are implying that is the case. Which is exceptionally reasonable! =)

    So there might be currency appreciation benefiting Iran...

    So Iran's income MIGHT be ok. (Which I think they are not)

    For oil refinery outages in the US, I agree that the may industrial deaths in refinery accidents does give a veneer of cause to have so many shut downs. But you never know... ho ho ho...

    As for which type of crude can be refined... I am not quite sure how flexible these refining units are in dealing with Heavy Sour as vs Light Sweet. But what you said is also very reasonable...

    So the US is not widening refining margin on purpose just to squeeze crude rich, but refinery poor Iran...

    But the reason why I think there is a conspiracy to squeeze Iran... is this...

    I can just imagine the Iranian side banging on the table going "reduce that REFINING MARGIN!!! OR WE UNLEASH MORE FIGHTERS IN IRAQ" hahhaha

    Also, finally why I think Iran is squeezed, why even tho Brent is at record high vs WTIC, Iran is still screwed... Is because they are raising pump prices.


    Heresy! in Iran!

    And is this raising in price substantial?

    YES!!! because they "compensated" for it with an interest rate cap by diktat. Thats like crazy! Dislocates the entire credit allocation mechanism in an economy.

    Anyhow, great comment from you,. I really enjoyed reading and thinking about it.

    As for storms. Well, that honestly no body knows.

  3. It was not coincidental that I was looking at the same photo of Crocker staring into Hassan Kazemi-Qomi across the table before I made my first comment .

    Whereas the Iranians first approached the US via Iraq, no later than 4 May 2007, with proposals for dialogue and good-will gestures, most US refinery outages occurred at least 2 weeks later . I cannot see it as a deliberate move by the US , who has already got the upper hand , to further pressurise Iran this way while hurting domestic US consumers.

    Iran got more than US$ 50 Billion selling crude oil last year , while spending US$ 4.17 billion buying gasoline from 16 countries over the same period. With Brent crude rising some 34% since the begining of this year, I think Iran's gain in crude oil sales more than compensates for the higher imported gasoline price.

    The reason Iran is raising the pump price is because the state has been subsidising the consumers for too long. Iran buys foreign gasoline for just over 50 cents a liter ($2 a gallon) and sells it for about 8 cents a liter (less then 40 cents a gallon). These are the highest subsidies in the region. As a result, nearly 2 million gallons of cheap gasoline is smuggled out to other countries every day ! This ridiculous situation has to be corrected somehow

    It has been very rewarding discussing this topic with you, and I greatly admire your knowledge in oil and precious metals. Never mind that crazy cat. You handed him a fish for dinner but he just forgot to take it until it stank, and then he blamed you for giving him a rotten fish. What a loser !

  4. 糟老頭 is good.

    Let me check out import figures for Iran. I suspect they spent more. What was your source on the US$4.16b... Let me have a look. For some reason, I got a feeling that they burn much more gasoline than that.

    There is no question why they are raising prices.

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  7. Thanks for the kudos !

    My quote of US$ 4.17 Billion came from here:

    There are other online sources which quote the figure as between US$ 4 to 5 Billion , eg:

    " Iran needs to import at least $5 billion worth of gasoline per annum in order to meet its growing demand in the domestic market." ,

    ( Sorry I have to delete my 2 previous posts because of my lousy HTML tags. )

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