Iran Nuclear Crisis Scenerios
FROM THE ECONOMIST INTELLIGENCE UNIT
The board meeting that started on March 8th at the Vienna headquarters of the International Atomic Energy Agency (IAEA) will determine how the dispute over Iran's nuclear ambitions develops over the next few months. In an effort to provide a longer-term perspective, the Economist Intelligence Unit has identified three broad outcomes for how the issue could unfold in the period up to 2010. Inevitably, this is a simplification—the situation will remain fluid and it will always be impossible to be sure that any given outcome will remain in place for the long-term. However, we consider that, for forecasting and business planning purposes, having plausible outcomes is essential.
Central outcome—Iran completes fuel cycle 45%
Iran completes the nuclear fuel cycle, either by agreement or not. This outcome implies heightened geo-political tensions over the next five years, with the US, EU, Russia, China and others offering inducements and threats to persuade Iran to give up its fuel cycle ambitions or at least agree to stringent safeguards. Iran is expected to respond in a mixed fashion, sometimes agreeing to compromise, but also threatening to break off talks, to disrupt the oil market or to promote armed action against US or allied interests which would as likely add to regional instability. However, within this outcome is also subsumed the possibility that Iran agrees to more stringent inspections in exchange for an array of inducements, including an end to economic sanctions (bilateral or multilateral). Ultimately, Iran is expected to complete the fuel cycle without the US and its allies resorting to military action. The high stakes negotiations, arguments and brinkmanship implied by this outcome suggests that a significant oil price "risk premium" will persist over much of the forecast period--something that is included in our central forecast.
Military outcome 35%
Concerns about Iran’s nuclear ambitions reach the point that the US, or less likely Israel, undertake air strikes against Iranian civil nuclear targets and succeeds in setting back the Islamic Republic's pursuit of the fuel cycle. It is assumed that the US would, as a precursor to such action, also have to target Iranian air defences. Under this outcome is also subsumed Iranian armed action in reprisal, or in pre-emption, of air strikes. A further armed escalation beyond these steps cannot be ruled out, including ground fighting and/or a wider regional conflagration encompassing targeting of US/US-allied, or Iranian interests. Should this scenario occur a substantial oil price premium would build, with crude of US$100 plausible (at least in the short term, when spare capacity in the crude market is limited).
Iran does not complete fuel cycle 20%
Iran is unable to complete the nuclear fuel cycle in-country. This would either mean a continuation of the current level of its civil nuclear capability in the context of economic sanctions and diplomatic pressure to constrain the flow of "dual-use" technology. Or, more likely under this outcome, there is an agreement by Iran to forego what it considers its right to be able to complete the fuel cycle in-country, in response to international economic pressure (short of oil export sanctions), fear of military attack, and in order to secure economic and diplomatic rewards. This outcome would carry with it the smallest (although not insubstantial) oil price premium.
This adjustment in our thinking on Iran has, of course, impacted on our assessment of oil prices over the forecast period. While we have been factoring tensions arising from Iran's nuclear ambitions into our oil price forecasts for some time, our new thinking suggests that these tensions will be higher than previously assumed. The permanent five members (P5) of the UN Security Council all voted (at the IAEA) to report Iran to the UNSC, a consensus which suggests that the international approach to Iran could be tougher than some had anticipated. In response Iran has resumed uranium enrichment, a move which is likely to further increase tensions. While we expect there to be periods of negotiation as well as confrontation, under our central scenario we expect oil prices to remain elevated for some time. The pressure on prices will be particularly acute in the first half of the forecast period (2006-08), partly because the US electoral cycle creates a window in 2007 and early 2008 when a more robust approach to Iran would be feasible, and partly because global spare capacity in the oil market will be tightest in that period (global oil supply will be rising more rapidly in the final years of the forecast period as recent investment comes on stream). We have therefore revised up our forecast for Brent dated oil prices to an average of US$60/b in 2006, US$55.25/b in 2007 and US$48/b in 2008 (previously US$55/b, US$46.75/b and US$40.75/b).
The board meeting that started on March 8th at the Vienna headquarters of the International Atomic Energy Agency (IAEA) will determine how the dispute over Iran's nuclear ambitions develops over the next few months. In an effort to provide a longer-term perspective, the Economist Intelligence Unit has identified three broad outcomes for how the issue could unfold in the period up to 2010. Inevitably, this is a simplification—the situation will remain fluid and it will always be impossible to be sure that any given outcome will remain in place for the long-term. However, we consider that, for forecasting and business planning purposes, having plausible outcomes is essential.
Central outcome—Iran completes fuel cycle 45%
Iran completes the nuclear fuel cycle, either by agreement or not. This outcome implies heightened geo-political tensions over the next five years, with the US, EU, Russia, China and others offering inducements and threats to persuade Iran to give up its fuel cycle ambitions or at least agree to stringent safeguards. Iran is expected to respond in a mixed fashion, sometimes agreeing to compromise, but also threatening to break off talks, to disrupt the oil market or to promote armed action against US or allied interests which would as likely add to regional instability. However, within this outcome is also subsumed the possibility that Iran agrees to more stringent inspections in exchange for an array of inducements, including an end to economic sanctions (bilateral or multilateral). Ultimately, Iran is expected to complete the fuel cycle without the US and its allies resorting to military action. The high stakes negotiations, arguments and brinkmanship implied by this outcome suggests that a significant oil price "risk premium" will persist over much of the forecast period--something that is included in our central forecast.
Military outcome 35%
Concerns about Iran’s nuclear ambitions reach the point that the US, or less likely Israel, undertake air strikes against Iranian civil nuclear targets and succeeds in setting back the Islamic Republic's pursuit of the fuel cycle. It is assumed that the US would, as a precursor to such action, also have to target Iranian air defences. Under this outcome is also subsumed Iranian armed action in reprisal, or in pre-emption, of air strikes. A further armed escalation beyond these steps cannot be ruled out, including ground fighting and/or a wider regional conflagration encompassing targeting of US/US-allied, or Iranian interests. Should this scenario occur a substantial oil price premium would build, with crude of US$100 plausible (at least in the short term, when spare capacity in the crude market is limited).
Iran does not complete fuel cycle 20%
Iran is unable to complete the nuclear fuel cycle in-country. This would either mean a continuation of the current level of its civil nuclear capability in the context of economic sanctions and diplomatic pressure to constrain the flow of "dual-use" technology. Or, more likely under this outcome, there is an agreement by Iran to forego what it considers its right to be able to complete the fuel cycle in-country, in response to international economic pressure (short of oil export sanctions), fear of military attack, and in order to secure economic and diplomatic rewards. This outcome would carry with it the smallest (although not insubstantial) oil price premium.
This adjustment in our thinking on Iran has, of course, impacted on our assessment of oil prices over the forecast period. While we have been factoring tensions arising from Iran's nuclear ambitions into our oil price forecasts for some time, our new thinking suggests that these tensions will be higher than previously assumed. The permanent five members (P5) of the UN Security Council all voted (at the IAEA) to report Iran to the UNSC, a consensus which suggests that the international approach to Iran could be tougher than some had anticipated. In response Iran has resumed uranium enrichment, a move which is likely to further increase tensions. While we expect there to be periods of negotiation as well as confrontation, under our central scenario we expect oil prices to remain elevated for some time. The pressure on prices will be particularly acute in the first half of the forecast period (2006-08), partly because the US electoral cycle creates a window in 2007 and early 2008 when a more robust approach to Iran would be feasible, and partly because global spare capacity in the oil market will be tightest in that period (global oil supply will be rising more rapidly in the final years of the forecast period as recent investment comes on stream). We have therefore revised up our forecast for Brent dated oil prices to an average of US$60/b in 2006, US$55.25/b in 2007 and US$48/b in 2008 (previously US$55/b, US$46.75/b and US$40.75/b).
posted by Marko at 4/03/2006 03:06:00 AM
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