US sanctions forbidding commercial engagement with Iran's Central Bank, aimed at discouraging countries and companies from buying Iranian oil, have been supplemented by the EU decision actually forbidding its 26 member countries from buying Iranian oil. (Iranian oil to the EU accounts for 7 percent of EU imports and 20 percent of Iran's global oil exports.)
The US is now giving the final touches to new sanctions against Iran that would: identify specific Iranian officials; affiliates and agents for sanctions; give the US legal authority to sanction companies that buy Iranian oil; and sanction companies in new energy-related joint ventures with Iranian partners in third countries.
Iranian leaders have responded with threats to close the Strait of Hormuz and have confidently asserted their country's ability to confront all military threats.
Estimates of oil passing through Hormuz vary between 1/6th to 1/3rd of world oil traded daily. At least 17 supertankers pass through the Hormuz every day, with 17 million barrels of crude.
Not surprisingly, these developments have alarmed observers, leading them to suggest that the closure of Hormuz could increase oil prices to over $200 per barrel.
Some voices have attempted to calm the situation, pointing out that Iran would not be so irrational as to actually close the Strait, which would prevent it from exporting its own oil.
Others have cast doubt on its ability to do so, while still others have noted that Gulf producers do have some alternative routes for their oil, at Fujairah and at the Red Sea, though obviously this would cover only a small percentage of total Gulf production.
Major Gulf producers such as Saudi Arabia and Qatar have also indicated they would be able to compensate for any loss of Iranian oil from the world market.
In this fraught atmosphere, the statement of Minister of Petroleum and Mineral Resources Ali Al-Naimi conveying the Kingdom's "wish and hope" to keep oil prices at around $100 a barrel has been received with surprising uneasiness, with one commentator even saying that this puts Saudi Arabia "in line with price hawks such as Venezuela." The Financial Times has published an editorial saying that the Saudi strategy has "sown the seeds of its own undoing, at home and internationally".
Western commentators, who seem to readily take in their stride the grave implications of their governments saber-rattling and bellicosity vis-à-vis Iran, find the measured statement of the Saudi minister unpalatable. This makes no sense.
Through most of 2011, global oil prices remained over the $100 mark.
Hence, Al-Naimi's statement is merely a recognition of an ongoing reality.
It is true that GCC oil producers now need higher oil prices to meet their fiscal obligations than was the case a decade ago.
It is widely recognized that hydrocarbons will continue to dominate the world energy scenario over the next 30-40 years, but the oil required to meet global demand will be located in more difficult areas and will be more expensive to explore and produce.
At the same time, Gulf economies need to significantly expand their downstream and petrochemicals sectors and pursue industrialization programs to obtain the best value-added returns on their depleting natural resources.
Again, in response to popular aspirations articulated during the Arab Spring, governments in the GCC have announced substantial and far-reaching programs to prepare their youth for employment and their nations for the achievement of the knowledge economy.
This is best illustrated by the recently announced Saudi budget for 2012 that proposes an increase of 19 percent in expenditure projected for 2011. This higher expenditure will be based on significant higher oil revenues.
Observers have suggested that, to meet its 2012 expenditure, the Kingdom needs an OPEC basket price of $95 a barrel.
Thus, Iran-related ongoing geopolitical tensions in tandem with the more benign needs of the GCC have ensured that oil prices of over $100 per barrel will rule global markets for the foreseeable future.
— The author, a former Indian ambassador to Saudi Arabia, is a Dubai-based energy consultant.
