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(Continued from Part I)

An Iranian/Iraqi War

Another area of conflict that has been under-reported by the media is the recent tension between Iran and Iraq. Few people grasp the severity of the escalating situation. Several weeks ago, Iran seized a small oil well in Iraq which Iran claims is part of its territories. Several days later, Iranian troops withdrew without giving an official explanation. However, due to the weak international response, Iranian troops returned to the area several days ago and now show no signs of backing off.
While the oil well itself is small and insignificant, the chance of an Iraqi and Iranian war is frightening. Iraq and Iran fought a war in the 1980s which resulted in over a million lives lost. Iraq has one of the largest oil reserves in the world. Last year the Iraqi government claimed to have the largest proven oil reserves in the world. As shown below, most of Iraq'smassive oil fields are located very close to the border with Iran. If there is an invasion by Iran, this could lead to huge disruptions in the Iraq’s oil production.



Potential Israeli Strike on Iranian Nuclear Facilities

This story that has gotten the most attention with regards to Iran. Pundits in the media are debating back and forth every day if Israel will strike Iran. While I am not privy to any intelligence information, my opinion is Israel will strike Iran’s nuclear facilities this year. I make this statement as someone who has spent many years in Israel and has close family in the country and I have a feel for the culture of the country. There is a bi-partisan consensus across the Israeli public that Iran cannot be allowed to obtain Nuclear weapons. There is no way Israel can allow a country which has threatened to wipe it off the map to obtain nuclear capabilities. In addition, Iran has been sending massive shipments of weapons to Hamas in Israel’s south and Hezbollah in Israel’s north. If Iran went nuclear, this would provide them a nuclear umbrella.
The deadline is running out, and soon Iran will reach the point of no return when it will be too late to stop their nuclear weapons program. There is growing speculation that even if the US will not help Israel, Europe will join in an Israeli strike which would set back Iran’s nuclear by several years.

Iran has threatened to close off the straits of Hormuz if attacked by Israel. The strip is only a few miles wide and is strategically located. As the map below shows cutting off the straits would prevent oil from flowing out of Southern Iraq, parts of Saudi Arabia, Kuwait and many oil rich Gulf States countries. Forty-percent of all seaborne oil shipments travel through the straits. The US could not allow Iran to close the straits, and this could create a full scale war with Iran. This in turn would further cause oil prices to skyrocket.







During the Arab oil embargo from 1973-1974, oil prices quadrupled in a very short period. While I am not an oil bull who believes in peak oil, I do believe that any of the four situations I mentioned in this article could cause a massive rise in oil prices. If all four occurred it could make the oil embargo in the 1970s look like child’s play. This situation is not farfetched. Like I mentioned, I strongly believe that there will be an Israeli (or joint Israeli /European) strike on Iran in 2010. This could lead to Iran retaliating by closing the straits of Hormuz, invading Iraq, and further trying to overthrow the Governments of Egypt, Yemen and Saudi Arabia. If this were to occur, it would be realistic for oil to more than quadruple from $80 a barrel to well over $300 a barrel.

Clearly the situation is extremely volatile in the Middle East. Iran is becoming an increasingly important and destabilizing player in the region. I think that any one of the four scenarios above would cause oil prices to increase to such high levels that it could cripple the fragile US economic recovery. If oil prices rose over $300, it would completely cripple the world economy. At this point, the best hope would be for a peaceful and democratic revolution which overthrows the mullahs of Iran. If this were to happen, I think we could see a dramatic decrease in oil prices. Let us all hope this happens, and that my $300 prediction does not come true.
Disclosure: none
Source: Will Middle East Tensions Drive Oil to $300? Part II