At first blush, the headlines of an Iranian deal to exchange lifting sanctions for not pursuing a nuclear weapon of mass destruction made me think, "Oh No! This deal is gonna send oil prices below $70 and destroy the economy of the Permian Basin where I live." No joke, Iran has the capability to export 2.5 million barrels of oil per day. They are limited by sanctions to only export 1 million per day.
My first thought is that the new oil frontiers of California, Maryland, North Carolina, Michigan, Wyoming, Colorado, New Mexico, North Dakota, Pennsylvania, and Wyoming would come to a screeching halt with oil under $70 per barrel. These are the states that are responsible for the little employment gains we have seen in the U.S. in the last five years. These states are responsible for the salvation of the defunked auto industry because of the massive amount of trucks that are used in the oil industry. The wealth effect of oil workers has trickled down to every area of the economy including retail, financial and industry.
But doing some homework I found this article about why the Iranian deal is full of loop holes and will simply allow Iran to get some sanctions lifted free without inspecting their secret military nuclear ambitions. Intelligence and military sources list seven of the most glaring loopholes in the first-step accord:
1. Parchin: This long-suspected facility remains out of UN oversight. President Obama and Secretary of State John Kerry boasted after the signing that daily IAEA inspections will take place at Fordo and Natanz. However, cameras are already fixed at both those facilities without an agreement, whereas Tehran's consistent denial of IAEA access to Parchin is not addressed.
2. Secret nuclear locations: Under the heading "Possible Military Dimensions," the last International Atomic Energy Agency (IAEA) report noted: "Since 2002, the Agency has become increasingly concerned about the possible existence in Iran of undisclosed nuclear related organizations, including activities related to the development of a payload for a missile." The watchdog has received information indicating activities "relevant to the development of a nuclear explosive device." This was further corroborated by new information obtained since November 2011. Tehran's non-cooperation for investigating these findings is not mentioned in the Geneva interim accord, nor was it addressed in the negotiations.
3. Dirty bombs: Iran doesn't need a full-scale nuclear bomb or missile warhead for attacking Israel. For decades, Tehran has been working on perfecting hundreds of dirty bombs as part of its nuclear program, by adding plutonium or enriched uranium to conventional bombs. These weapons are easy to make and easy to use. In the hands of Hizballah or other Shiite terrorist organizations in Syria or Iraq, for instance, they could be used to strike Israel without leaving a trail to Tehran. This peril too was ignored by the six powers in Geneva.
4. Rollback. While President Obama has presented the deal as a first step toward freezing or even rolling back "key aspects" of Iran's nuclear program. The fact remains that, so long as Iran is permitted to enrich uranium, even though this is restricted to a low 5 percent grade, it is free to produce as much fissile material as it wants, whenever it wants. This seems more like roll forward than roll back.
5. Enrichment. Obama and Kerry said the new deal does not recognize Iran's right to enrich uranium. They were contradicted by the Iranian president and senior negotiator as well as Russian Foreign Minister Sergey Lavrov. So what is the truth? If Iran won recognition for this right, it blows the bottom out of the Non-Proliferating Treaty because, in no time, all the signatories may start enriching uranium with permission from the big powers. Neither is there any point in making Iran join the NPT's Additional Protocol for snap inspections.
6. Centrifuges. Iran has undertaken not to add new centrifuges to its enrichment facilities, according to President Obama, but there is nothing to stop it from keeping up their production. In the six-month interregnum for negotiating a comprehensive nuclear deal, Tehran wins time to turn out enough centrifuges to substantially expand its production of enriched uranium.
7. A leap to breakout: Far from being static or in freeze, as the Americans claim, Iran is free to step up centrifuge production and boost its stock of 3.5 percent enriched uranium, thereby accumulating enough material to enhance its capacity for producing enough weapons-grade uranium to break through to a nuclear bomb rapidly enough to defy detection by the IAEA or Western intelligence until it is too late.
Although this deal sounds very promising as a first step towards lasting peace, it very much depends on Iran's integrity to insure that it complies with the spirit of the agreement not just the word-for-word terms. Iran could comply with the letter of the deal and still be miles ahead of its secret military nuclear weapons program. This agreement could put Israel alone to insure that Iran does not produce a nuclear weapon. It needs to do this for its national survival. Since this deal gives political cover to the nations that signed the accord (US, Russia, China, UK, France and German), it could put Israel in a poor light for launching a first strike against Iran. Iran could say we have no secret nuclear weapons and have complied with all the terms of the deal with the six nations. (Yea, right).
Terms of the deal are not supposed to lift sanctions of oil. They do allow up to $1 billion of sales of petrochemicals to its internal population, not for export. The level of exports is not likely to change because of the Iran deal in the next six months. The prospects for lifting oil and financial sanctions depend on what Iran does during the next six months. Although there are significant loopholes in the negotiated settlement, it does give some hope to moderate Iranians who do not want to live with constant war and desire peace. I hope the Administration and those other nations who signed the treaty learn about the 7 loopholes and address them now. Otherwise, Israel will likely strike Iran's secret nuclear facilities within the next six months if Iran tries to outfox the spirit of the deal.
I no longer fear I will see $70 any time soon. In fact I believe that $90 is likely the bottom we will see over the next six months and perhaps for the next decade. I wouldn't be surprised to see Warren Buffett doubles his holdings in Exxon (NYSE:XOM) and Suncor (NYSE:SU) after the Iranian deal because of the high likelihood that Iran will be working on its nuclear weapons projects underground and that Israel will strike.
Disclosure: I am long XOM, EOG, DVN, SDRL, OTC:OTC:LSTMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I do not intend to sell any of my energy holdings in the next 72 hours although I may add to LSTMF.