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Increases in oil prices during the Iran-Iraq war (1980-1988)

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on 30 January 2013

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Transcript of Increases in oil prices during the Iran-Iraq war (1980-1988)

Chronology of the conflict Sept 22, 1980 1988 Sept 1980 The Increase
in Oil Prices Iran-Iraq War
(1980-1988) War Beginning of the conflict July 1982 Iran on the offensive 1982 Iraqi invasion of Iran Aug 1988 End of the war Iraq Iran Khuzestan (oil-rich Iranian province) Shatt al-Arab Waterway INTRODUCTION War between the Islamic Republic of Iran and the Ba'athist State of Iraq
Sept 1980 - Aug 1988
Longest conventional war fought in the 20th century
Between 500,000 to 1 million dead
A WWI "2": total war, a war of attrition involving the economy and the civil society of both countries (chemical weapons, "sale guerre"). THE ORIGINS
Fear that Shia Islamic Revolution and Pan-Islamism propagate (frets over a revolutionary spillover to Iraqi Shias > 50% of the population)

Weakening of Iran following the unrest of the Revolution (easy target)

Saddam Hussein’s ambitions to transform Iraq into a hegemonic regional power.

Long-standing border disputes

Seizing Iranian oil fields and becoming the one and only big regional oil producer. (geo-strategic argument) ENERGY DIPLOMACY PROBLEMATIQUE Research question: To what extent can we argue that the Iran-Iraq war was responsible for the great fluctuations in oil prices in the 1980s? Thesis: While the Iran-Iraq war, was clearly responsible for a sudden drop in supply and an increase in prices in the first years of the conflict (I), it did not, against all odds, provoke another oil shock between 1982 and 1988. OUTLINE I) At first, the conflict incurred increases in prices and woke up the fear of second "1973" A) The 1979 crisis and the Iran-Iraq war for oil escalates and depresses the international economy B) The internationalisation of the conflict The risk of a new oil shock II) Yet, the pure effect of the Iran-Iraq war on oil prices seems paradoxical. Prices dropped A) An intriguing paradox ... B) ... explained through supply economics Bibliography M. S. EL-Azhary, The Iran-Iraq War: An Historical, Economic and Political Analysis, Palgrave Macmillan (March 1984)

Oil and the Outcome of the Iran-Iraq War, MERIP Report No. 125/126, The Strange War in the Gulf (Jul. - Sep., 1984), pp. 40-42

The lran-Iraq War And lts Effects On Turkey, Evren ALTINKAS, Uluslararasr Hukuk ve Politika

Past oil price shocks: Political background and economic impact. Evidence from three cases, Pascal Ditté and Dr Peter Roell

Oil Price History and Analysis, Politics of eZine, 2008, http://politics.lilithezine.com/History-of-Oil-Prices.html

Middle East Institute Viewpoints: The 1979 “Oil Shock:” Legacy, Lessons, and Lasting Reverberations, 2009, www.mei.edu

The Iran-Iraq War, Rob Johnson, Palgrave Macmillan, 2011

Baylis et al: Strategy in the Contemporary World 2e, Conflict Without Victory: The Iran-Iraq War

Dilip Hiro, The Longest War: The Iran-Iraq Military Conflict, Routledge, dec 2012 Shatt al-Arab
waterway I) "It's the oil, stupid!" Iranian Islamic Revolution:
1979 oil shock (Iranian production collapses, global prices skyrocket)

The Iran-Iraq war compounds and prolongs the effects of the Iranian Revolution. Stalemate 1986 1986 C) ... explained through demand economics Iran + Iraq = 54% of the OPEC total oil output.
combined production losses were tantamount to 6% of global oil production
Loosing 4 million b/d
Prices skyrocketed (peak at 39$/barrel in early 1981)
Energy becomes way more expensive Consequences:

Economic slowdown (from 4% in 1979 to 0,8% in 1982)
Trade relations and foreign direct investments
Rampant inflation
Growing unemployment rates
Uptick in consumer prices The risk of a general shutdown = the internationalisation of the conflict The Tanker War (1984-88)

-> General stalemate on the field (the "broken-back" war)
-> Resort to economic struggle-to-death tactics (bombarding oil tankers, oil fields, mining the Straight of Ormuz...) Saudi Arabia Kuwait The Internationalisation of the war Belligerents' extremism => risk for the whole region (65% of world production!)
Attacks of neutral countries (e.g. Kuwait)
Superpowers favored energy security and stepped in.
Although prices waned after 1983, risk of complete shutdown of the Persian Gulf II) The Paradox • Conventional, all-out destructive war between two major oil producers
• Constant bombardments in regions where oil resources where are located
• A very long conflict
• Oil production reaching a nadir in both countries
• Growing tensions in the whole region. 1st possibility:
Oil price shocks reflect shocks to the supply of oil in the form of interruptions of the production
But supply cuts of similar magnitude seem to have had very different effects 2nd possibility:
increase in precautionary demand for oil
wars shift the demand for oil, rather than the supply of oil. Explaining the paradox I: The Demand Side • Developed countries learnt the lesson from 1973
• OECD oil stocks at the outbreak of the war remained at record high levels
• Major shifts in world energy markets during the 1980s: decrease in energy intensity
• US price controls Explaining the paradox II: The Supply Side New resources, new suppliers ...
New suppliers (Nigeria, UK, etc.)
the crisis in the 70s prompted increased exploration and production among non-OPEC countries: (Mexico, Norway, the UK Glut on oil markets, and deterioration in oil prices.)

... and the failure of the OPEC
The OPEC countries tried to maintain a very low production
Monumental failure
The war undermined OPEC cohesiveness and market control, and split member-countries along political lines (Iran v. Saudi Arabia) CONCLUSION What do we fear? War, unrest, cuts in production, recession No constant, unalterable rule in world energy diplomacy => singularity of situation and different sets of conditions Discussion questions With the United States striving for "energy independence" (shale gas), do you believe that its stabilizing role in the Middle East will decrease in the future? In the event of an Israeli strike on Iran and if Iran shuts down the Straight of Ormuz, do you think there could be a new oil shock?
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