DAN SHERMAN--IRAN OIL CRISIS

Dan Sherman

Dan Sherman has a different take on the hoarding of oil I wrote about yesterday. The thesis is the same. Oil demand has been growing faster than GNP which means excess oil is being stored somewhere.

The purpose of hoarding could be for one of two reasons. The hoarders believe the price is going much higher or there is a serious risk of a supply disruption; possibly due to a stand-off with Iran.

Bush has the support of the allies. He has let Iran know that nuclear weapons are not acceptable. Bush sent Ms. Rice to solidify support and to warn Iran to play ball or suffer consequences. The situation is fluid but positive signs have surfaced.

As far as the Strategic Petroleum Reserve, the US only adds 7 million barrels per month. Having the reserve is good policy. But the demand placed on the supply is drop in the bucket. The daily world wide demand is 83 million barrels per day.

During the 1990 economic boom, oil prices hit a peak by January 1996 and the global economic boom continued for several more years. The pattern looks of this decade is similar. It takes markets time to adjust after a price spike. Production is being increased and conservation measures are being adopted.

The economy will gradually automatically adjust. Just like the stock market discounts the earnings, the oil market is currently discounting the risks of disruption. Like Dan indicates, if nations are prepared, a cut off of Iran's oil would not be nearly as large a crisis.

We must hope a shut off is not necessary. Bush is applying great pressure. Syria finds itself between a rock and a hard place. Iran is the bigger problem. All the Iranians need to do is look at neighboring Iraq and Afghanistan to know that George means business. After Iran plays games for a while, I believe they will recognize it is in their interest to be a good neighbor to the rest of the world.