Inflation and the oil price
Without rising oil prices, this year’s inflation will be better than expected. The Middle East is still by far the most important oil producer in the world. With the departure of Donald Trump, Saudi Arabia and Israel are losing the unconditional support of the United States. At the same time, Iran can count on a relaxation of the sanctions under Biden. This also brings a new confrontation between Iran and the Saudis closer. This may lead to a higher oil price, but also to a lower oil price because there is then a risk that the OPEC cartel will fall apart. Greater instability in the Middle East may increase volatility this year.
Exactly one year ago, tensions between Iran and the nemesis of the United States culminated in Soleimani’s death on 3 January 2020. Earlier, the withdrawal of the US from the nuclear deal with Iran had already brought about a turnaround. After Soleimani’s death, Iran launched rocket attacks against US targets in Iraq. There is also still a warrant for Trump’s arrest and 35 others for the general’s death. Last week the US forces sent two B52 bombers to the Middle East for ‘flyovers’, to show Iran that it is serious if it wants to avenge Soleimani’s death again. A submarine with nuclear missiles on board was also sent to the Gulf region. Iran informed the United Nations a week ago that it wanted to enrich uranium to a purity of 20%. That was probably a direct response to the liquidation of atomic scientist Mohsen Fakhrizadeh, the brain behind Iran’s nuclear programme. According to Iran, Israel was behind the assassination attempt. By further enriching uranium, it is once again in breach of the 2015 agreements. For example, the country enriched uranium ten times more than is permitted under the deal. In addition, Iran is not allowed to enrich uranium beyond 3.67% purity, but it is already at 4.5%. For a nuclear weapon, uranium has to be enriched to more than 90% purity.
A day before Biden announced his foreign minister, there was a meeting between Benjamin Netanyahu and Mohammed bin Salman. It was the first time that an Israeli Prime Minister had visited Saudi Arabia. In the Middle East, your enemy’s enemy is automatically your friend. Famous is the story that Kissinger told the Soviet foreign minister Gromyko about the scorpion who wanted to cross the Suez Canal. The scorpion asked a camel if he could travel with him on his back. The camel did not want that because if the scorpion stabbed him, he would have to pay with his death. But the scorpion indicated that he would drown so that guaranteed him that the scorpion would do nothing. In the middle of the Suez Canal, the scorpion still stabbed. Asked by the camel why he did so, the scorpion laughed that the camel had forgotten that they were in the Middle East. Due to the loss of support from the Americans, the Sunnis tightened ties with Jerusalem, and the Shia under Biden were given more space. This probably means that Iran will be allowed to export more oil, while production restrictions have been agreed upon within OPEC. It will be difficult for OPEC to keep both Tehran and Riyadh happy.
Not all the oil in the ground will be pumped into the Middle East. The energy transition means that the various oil-producing countries will have to hurry up in order to become less dependent on oil revenues. They have been doing this since the oil crisis of 1986 but without too much success. New Iranian exports or the break-up of OPEC may put pressure on the price of oil this year, but rising tensions between Israel and Iran or between the Saudi and Iran may, on the contrary, increase the price of oil. In the short term, Iran is therefore an important part of the oil price puzzle. In the long term, the market share of oil from the Middle East will increase, because nowhere else can oil be extracted as cheaply as in the Middle East. It should also be borne in mind that extremely low oil prices have meant that much less has been invested in new production, which, if the world economy opens up quickly, will increase demand more quickly than supply can keep up with it. A successful vaccination programme, therefore, increases the risk of inflation. The resulting higher price of oil gives the countries concerned the financial breathing space to further escalate the situation in the Middle East, resulting in even more inflation.