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ENERGY SHOCK: A time bomb is ticking

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Iran’s nuclear ambitions and Europe’s economic turmoil could place the world’s energy market in a state of chaos.

July 17, 2012 11:30 by

A time bomb is ticking.

The problem is that the world’s energy and financial markets don’t know what kind of time bomb they have on their hands. For one, it could be what most outside of Iran dreads: nuclear capability achieved by the Islamic Republic. Another kind of bomb the world could be facing is more figurative. It’s a financial bomb in the form of American sanctions placed on Iran.

Yet another type of ticking time bomb is Iran making good on its threat to close down the Straits of Hormuz. All three sce­narios – not entirely unrelated, of course – have the power to place the world’s en­ergy markets into complete chaos. And what could follow, in each case, is the price of crude oil could reach an unthinkable high price.

“An oil shock resulting from [a United States/European Union] economic con­frontation with Iran would ripple through­out industries around the world – and could also derail the global economic recov­ery,” state analysts in a recent report from Moody’s. “While the risk of an oil-price supply-side shock arising from Iran suc­cessfully blocking the Strait of Hormuz for an indefinite period appears small, it could have a considerable impact on global eco­nomic growth. Sustained high prices could destroy demand for oil, eventually trigger­ing a severe correction in oil prices, which, in turn, would adversely affect financial re­sults across the oil and gas sector.”

At this point, nobody knows for certain how closely the United States and the Eu­ropean Union will enforce such economic sanctions. The United States has said that on June 28 of this year it would block ac­cess to its financial system for any entity that deals with the Iranian Central Bank, according to Moody’s. The European Union stated it would ban Iranian oil im­ports just days later, on July 1. Although the United States does not import any Ira­nian oil, the E.U. does for a whopping 18 percent of Iran’s oil exports. Add in China, Japan, and India to the embargo nations, which currently account for half of Iran’s exports, and it’s clear that an energy crisis would ensue at the pump.

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