Will Iran's Election Result Shift Oil Prices?

(MoneyWatch)  In Iran, Mahmoud Ahmadinejad appears likely to hang onto the office of president, despite allegations of election fraud from his rivals. The result will please the country's hardliners, but could have a negative affect on oil prices in the longer term, an idea explored yesterday at Rigzone.

Right now, it's unlikely that the election will do much to oil, today at $72 a barrel. Yet Iran is the world's fourth largest oil producer, so political shifts in the country do matter internationally. A good scenario is a continuation of "business as usual" under Ahmadinejad, which would mean ongoing trade sanctions. As the sanctions go on, Iran's ability to ramp up in response to rising world demand will stay limited.

A worse scenario is that Iran's relations with the rest of the world will worsen over the next few years. Ahmadinejad has consolidated his power, but he may also be getting locked into the role of a populist. His win four days ago, if valid at all, was due to strong support from Iran's rural provinces.

The problem with populists is that they usually end up paying for their support, offering lower taxes and social support to the nation's poor. In Venezuala, for example, Hugo Chavez has severely damaged the long-term prospects of his country's oil and gas industry by seizing assets and directing money away from reinvestment in producing fields.

Iran may not be terribly different from Venezuala or other countries that have tapped oil wealth for social stability, including Mexico and Russia. Unemployment figures have risen over the past few years, and oil is biggest source of available wealth, making it a tempting purse to dig into.

Finally, there are promising signs that the oil industry next door in Iraq will finally be getting back on its feet, after years of languishing. New production there could easily offset whatever Iran loses. But if talks between the United States and Iran don't work out, and Ahmadinejad continues his aggressive posturing (or worse), the entire region could be disrupted.