Could new sanctions against Iran spark a crisis that drives oil prices to $200 a barrel?
The leaders of the Group of Eight (G8) economies certainly hope not.
Even still, they recently unveiled plans to tap into global emergency strategic oil reserves — just in case.
Citing their "grave concern" over Iran's nuclear program and the "likelihood of further disruptions in oil sales" G8 leaders put the International Energy Agency (IEA) on standby to tap the reserves at a moment's notice.
"Looking ahead we…stand ready to call upon the IEA to take appropriate action to ensure that the market is fully and timely supplied," said the statement summing up their meeting last weekend.
But the G8 may just be trying to calm the markets before the storm. History shows that tapping into the reserves won't do much to prevent higher prices.
And there's no reason to believe this time will be any different.
New Sanctions Mean Higher Oil Prices
Even as Iran denies it's trying to build a nuclear bomb, Washington and Israel are imposing tough new sanctions to force Tehran to allow more U.N. inspectors on site.
The U.S. will kick things off by imposing a set of tough new sanctions in late June. Then matters will escalate dramatically on July 1 when the European Union begins an embargo of all Iranian crude.
The new sanctions may be the straw that breaks the camel's back when it comes to higher oil prices.
In fact, current measures have already reduced Iran's oil exports by more than a fifth this year.
What's more, in response to the tougher measures, Iranian Supreme Leader Ayatollah Ali Khamenei has denounced the sanctions and promised to close the Strait of Hormuz if they are instituted.
And make no mistake about it — closing the Strait of Hormuz would put a chokehold on global oil supplies – and send the price of oil and gas into the stratosphere.
The narrow body of water links the Gulf — and the oil-producing states of Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — to the Indian Ocean.
On any given day, about 40% of the world's tanker-borne oil passes through a shipping lane only two miles wide at its narrowest point.
And although it's unlikely Iran could keep the strait closed for extended periods, it won't take long for crude prices to react, according to Dr. Kent Moors, Editor of Energy Advantage.
"Closing the strait would result in a rise in crude oil prices of between $20 and $40 a barrel in a matter of hours," he said.
Should the strait remain closed for 72 hours, traders will push up the price to $180 in New York, and closer to $200 in Europe.
As far as gas prices are concerned, each $1.00 rise in a barrel of oil would result in a 3.2-cent rise in a gallon of gasoline. So $200 oil equals roughly $6.00-plus gasoline.
And that's something the G8 leaders want to avoid – at almost any cost.
Releasing Reserves a "Non-Starter" for Oil Prices
It's unclear why the leaders have decided on a course of action that has failed to dampen oil prices in the past.
Last summer's decision to release 60 million barrels from IEA member strategic reserves in response to supply disruptions in Libya largely turned out to be a failure.
The experiment did drive down oil prices – initially. But even with Saudi Arabia pumping an additional 500,000 barrels of oil a day, oil prices still went higher.
When the program began on June 23, 2011, West Texas Intermediate (WTI) benchmark crude closed at $94.425 in New York, while Brent crude in London ended at $113.77.
When the release was called off on July 22, WTI stood at $99.175, and Brent was up to $117.80.
According to Moors, yet another release of reserves is a "non-starter."
"Should it be continued for any length of time, the strategic reserves would have to be replenished by purchasing crude at above market rates," Moors said. "It defeatsthe entire exercise."
Profiting From $200 Oil
So how can you protect yourself against the prospect of $200 oil?
If the Iranian crisis drags on for an extended period, investors should shift their focus to North American-based production, Moors says.
Companies – like Calgary-based Suncor Energy (NYSE: SU) – that are active in Canada's oil sands are one way to go.
Exchange-traded funds such as the United States Oil Fund LP (NYSE: USO) is another way to profit from higher oil prices.
But don't wait until it's too late…
What Kent learned on his way to an emergency meeting at Windsor Castle, leads him to believe that $200 a barrel is now a low-ball estimate.
You can learn more about Moors' Energy Advantage newsletter and the big move higher for oil prices by clicking here
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