A Scary Prospect: Iran, Oil and Commodity Prices

The rising crisis and potential near-term Israeli military action in Iran has become an interesting -- and scary -- subject of conversation in our house of late. Politics and ideology aside, if military action does occur, I have no doubt that commodity prices with an indirect or direct tie to oil will be in for a wild ride, potentially making the rises tied to Katrina and the Iraqi invasion look small in comparison. And certainly oil itself will be in for a major spike as well if intervention occurs. While long term, a more stable and Western-friendly Iran would be good for energy and commodity prices, the next twelve months could see Iran disrupt supplies. According to a dispatch from Reuters earlier this morning, "Crude oil prices rose back above $64 a barrel [today] on worries that any further escalation of tension in Iran might disrupt supplies from the world's fourth largest oil exporter."

The San Francisco Chronicle also had an insightful take on the issue as well: "A critical problem is that Iran is a major oil exporter. Oil prices are already high, and supplies are tight. Any major disruption in Iran's exports could send prices soaring, which most countries would find unacceptable -- not to mention American consumers." And we should not forget China's role in defusing or fueling the crisis, given their import alliance with Iran: "China, a critical part of any ... effort because of its permanent seat on the Security Council, is a voracious oil importer. It recently negotiated a huge, multiyear oil import program with Iran."

In the coming months, we'll continue to monitor the Iran issue at Spend Matters from a commodity pricing and economic perspective. It's my view that astute procurement organizations will do the same, potentially taking preemptive action by using hedging and derivative strategies to mitigate potential pricing impacts on their organizations due to instability and conflict in the region. Proactive Spend Managers will also take early action to avoid supply disruptions -- let alone price increases -- by developing detailed contingency plans.

Jason Busch

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