On Friday last we heard that Iran had satisfied all the criteria required by the International Atomic Energy Authority that its centrifuges for enriching uranium meet the requirements to lift sanctions as promised in the détente agreement, and the new leadership, has opened up the country to International scrutiny.
The world is salivating at being given access to the 88 million inhabitants, who have sat outside the world economy for the last 36years, ever since Ayatollah Khomeini, returned to Iran, and the western backed Shah, fled in the Iranian Revolution. The American Embassy was seiged, and its staff held hostage until a negotiated release, 444 days later.
Both European and American, foreign secretaries are giddy with delight, that the Iranians have met their requests, and they can now send in the big guns. Europe has already received orders for 114 new Airbus Aircraft, and the big American Corporations will no doubt be hoping to deliver many of their products to that formerly pariah state. But underneath the euphoria, is another concern.
Iran with the 4th largest oilfield in the world, after Saudi-Arabia, Russia and the U.S., hopes to increase production to 1,000,000 barrels per day (bpd). This will be added to the almost 10,000,000 each that the big three produce. The price of oil, already depressed by the excess production due in large part to the additional supply that has been made available by America’s fracking revolution, and the high price of $147/barrel reached in 2007, which encouraged a flock of explorers and juniors who borrowed heavily during the boom years and who have added to current supply.
Already pundits are suggesting that the oil price could plummet to $10/barrel, which would decimate the higher cost producers, reducing output in many western oil-fields. This will in all likelihood lead to another situation in oil prices a few years out, just as happened in the period from 1971-1981.
The 1970s revisited…
A number of events kick-started that turmoil during the 1970s. International demand for oil had exploded in a little over 2 decades, from just 3.7 million barrels per day in 1950, to 34.2 millions per day by 1973, and restrictions on supply by OPEC, (Organisation of Petroleum Exporting Countries) because of the unrest in the middle-east as Egypt, Syria and Jordan had attacked Israel in the 1967 six days war and this had begun to bite. In May 1970, the TAPline (Trans-Arabia Pipeline) from Qassumah in the Persian Gulf, through Iraq, and Syria to Sidon, on the Lebanese coast had been struck by a bulldozer, and oil to Europe cut off. Whether this was accidental or intentional is debated, but the Syrians wanted more for their oil transmission fees before they would repair it. At the time, the Nigerians, were in a civil war in Biafra a province of Nigeria, that would later become famous for the famine it would cause; the arab nations were still smarting from their defeat in 1967 against Israel, and their hatred of the U.S. backed nation, runs deep, and during the six days war in 1967, the Egyptian President closed the Suez Canal, which meant oil tankers leaving the Gulf had to go round the Cape, to Europe and America, and all this reduced some of the glut.
In 1969, on September 1st, a little known Libyan Colonel – Muammar el-Qaddaffi, took over the reins of power in Libya, from King Idris. In doing so he spoke out against the colonial powers, and he would raise the price of oil to Europe, by $0.40 because of its proximity.
In 1970, the Vietnam war was in full flow, and U.S. dollars were flowing out around the world like confetti. In that year, the world oil price (now called Brent Crude) was $1.80/barrel in February 1971 (Texas Oil – now known as WTI – was $3.45). Exactly four years after the anniversary of Qaddaffi’s rise to power, the Libyan oil fields were nationalised. The middle-east was in the middle of a battle with Israel. In the summer of 1973, the oil price was already being dictated to the oil majors at $5.12. Within a few weeks they doubled the price again, taking the oil price to $11.65. In just four short years, the price had risen fourfold. Iran had auctioned oil as high as $17/barrel.
This rise in oil fed through into inflation, and at a time of union power, wages rose in line with prices, pushing inflation to 26.9% in the UK by the Autumn of 1974. It didn’t help, that the Heath government, had watched the money supply grow 25% during 1973, and the chickens were now coming home to roost. The stock market collapsed as oil prices rose. Second line, British Banks went to the wall and over the next two years, Britain and America entered a recession. In late 1973, Britain’s Heath Government, instigated the three day week, when lights were left off, and businesses closed. Then, as now, politicians pumped into the economy millions to save the Banks. Oil prices came down and Britain in 1976, had to call in the IMF to save it from default as bond prices collapsed eliminating this source of revenue and destroying the nation’s finances.
Some ten years after Qaddaffi took office, Saddam Hussein took the reins in Iraq. (If you’re interested, you can read about his rise to pre-eminence here —>>>; http://www.int-review.org/terr37a.html) and who had an equally prominent place in this tale of woe, later in 1979, the Iranian revolution would take oil prices to $41.00/barrel over the next two years as Iraq and Iran pushed up oil prices to pay for arms as these two islamic nations were about to go toe to toe.
The current price of oil, is therefore too low to sustain western producers, and when they’ve been killed off, the OPEC nations in the middle-east, will reap the profits, but, the shortage of oil might push prices back into the stratosphere.
And even if that might not be the problem there’s a bigger issue. The Kingdom of Saud with its Sunni religion hates Iran, with its Shia version of Islam, and the American back-slapping of Iran could cause the Kingdom to stop selling oil in dollars, and choose Yuan instead. And THAT could cascade around the middle-east killing the Western Banking system, and bringing about the dollar collapse, that Bill Bonner, Jim Rickards and others have long been prophesying.
Or Germany in 1923?
As the currency expanded 25% in the UK in 1973, the subsequent rate of price inflation went up almost 27% when that money hit the economy… Now imagine what an 800% increase in the U.S. money supply since 2004 will do, when that money leaks into the economy… For those who can’t, or are too lazy to do the maths, that 200 thousand portfolio, will buy around 50,000 worth of goods and services, and after the tax man has had his cut, you’ll think you’re well off
Anyone who is further interested in the period of the 1970s, and the machinations of the oil and currency-wars, and events that impacted them would do well to read: “Paper Money”, by Adam Smith (the nom-de-plume of George J.W. Goodman, who worked in Finance and Letters after graduating from Harvard, and becoming a Rhodes Scholar at Oxford, where he wrote a novel on financial bubbles, and went on to work as a writer for the New York Magazine)
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