Ken O’Brien
Republican Presidential candidate Newt Gingrich has taken two contradictory positions on two critical issues. One is in the area of domestic energy prices and the other is in the area of foreign policy.
Gingrich has recently promised that under his Presidency he would return America to $2.50 per gallon gasoline.
On the other hand he has pledged to participate in a joint military action with Israel to prevent Iran from gaining a nuclear capability.
A recent report by the Council on Foreign Relations demonstrates the total inconsistency of these two positions.
The study, titled “Managing Oil Market Disruption in a Confrontation with Iran”, was prepared by Robert McNally. He is the founder and president of the Rapidan Group, a consulting group specializing in energy markets and policymaking. He has previously served as an oil market analyst with Energy Security Analysis, a market and policy analyst for Tudor Investment Corporation, special assistant to the president on the National Economic Council, and senior director for international energy on the National Security Council. He earned a BA/BS in international relations and political science from American University and an MA in international economics and American foreign policy from Johns Hopkins Paul H. Nitze School of Advanced International Studies (SAIS).
The study examines a range of scenarios including an Israeli or U.S. attack on Iran’s nuclear facilities, but no oil infrastructure damage or disruption.
According to the study, the results of such an action would be, “A military attack by Israel or the United States on Iran’s nuclear facilities would likely lead to a sudden price shock (about $23 per barrel in the first days should Israel strike according to a Rapidan Group survey of market participants) as traders priced in risk of a wider conflict. Subsequent price behavior would depend on market participants’ expectations of the likelihood and duration of a conflict that damaged gulf infrastructure or blocked the Strait of Hormuz.”
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The more extreme scenario would be a regional conflict, including temporary closure of the Strait of Hormuz.
According to the report, “If a confrontation with Iran escalated to a regional military conflict that disrupted oil traffic through the Strait of Hormuz, it would be much harder for the IEA to handle, unless the disruption lasted only a few days. About 17 mb/d flows through the Strait of Hormuz. Its closure, even for a short time, would dwarf any disruption in modern history in daily terms. There may be some options to redirect some gulf exports away from the strait. Saudi Arabia could redirect 1.5 mb/d of production through unused capacity in the East-West pipeline to terminals near Yanbu, Saudi Arabia, which is on the Red Sea. A new United Arab Emirates pipeline, which bypasses the Strait of Hormuz, is expected to be ready to ship crude oil in the summer of 2012, and could provide an additional outlet for up to 1.5 mb/d. “
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According to a report in The Hill, the first scenario could result in an almost immediate spike to $5 to $6 per gallon of gasoline (in relation to current price levels of $3.79 at the time of the interviews).
Under the second scenario of a prolonged disruption, prices could rise to $11 per gallon for gasoline in the U.S.
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