Trump Advisor Claims Iran "Terror Premium" Has Driven Up Oil Prices for Decades

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Source: Caixin

According to Reuters on March 16, White House trade advisor Peter Navarro stated in a report that threats from Iran have caused a “terror premium,” pushing up global oil prices for decades. Tensions with Iran have added a premium of $5 to $15 per barrel to crude oil prices, as the market prices in the risk of attacks or disruptions along the Strait of Hormuz, a key oil transportation route.

The report estimates that, historically, risks related to Iran have caused oil prices to be 7% to 21% higher than fundamentals, reducing global output by 0.1% to 0.4% annually, or $100 billion to $450 billion per year. Over the past 25 years, the cumulative economic impact could exceed $10 trillion, roughly equivalent to Germany and Japan’s annual total output.

However, the report’s conclusions have been questioned by energy market experts. Houston-based energy economist Ed Hirs said he has not seen the report himself, but to his knowledge, there is no solid evidence supporting such a premium, and the report seems to overlook the costs of military action against Iran.

Hirs stated that if risks related to Iran disappeared, oil prices could fall below $60 per barrel. He cited Federal Reserve research indicating that U.S. oil producers need about $70 per barrel to break even. He added that researchers often ignore the huge costs that military conflicts could entail. Hirs said, “The question is how much it will cost to achieve the goal. The fact is, we’re just adding it to the government’s Mastercard bill.”