Oil Price Implications of a Strike on Iran

Raymond wrote:

About a month ago you wrote an article looking at geopolitical risks, and identified a strike on Iran as the most pressing current situation. Any updated thoughts on that?

Yes, I wrote to subscribers last weekend about what an Israeli strike on Iran could mean to oil prices. I concluded that it would probably bring a spike higher, but that such a spike might finally be the blow-off top needed to get the price moving lower again, "once everybody sees that no barrel of oil was harmed in the making of this movie."

Also over the weekend, Barron's agreed with the general idea that the price of oil is near a top. In his article "Bye, Bubble? The Price of Oil May Be Peaking," Andrew Bary wrote:

In the next decade, oil indeed may hit $200 a barrel. But prices could fall to $100 a barrel by the end of this year if Saudi Arabia makes good on its pledge to increase production; global demand eases; the Federal Reserve begins lifting short-term interest rates; the dollar rallies, and investors stop pouring money into the oil market. China raised prices on retail gasoline and diesel fuel by 18% Thursday, in a move that is expected to curb demand.

Keep in mind that neither Mr. Bary nor I were discussing the longer-term trend in oil prices, which is higher for the simple reason that rising demand is meeting static or declining supply. We were discussing the potential for medium-term price relief.

Others are not nearly as sanguine. The BERR Assessment made clear to The Oil Drum Europe that current high energy prices and associated inflation are not "a transient blip when the UK seems to be in a terminal dive towards insolvency" from an accelerating deficit in oil and gas surpluses. Euan Mearns wrote:

We should hopefully by now have reached a point where all stake holders in UK, European and Global energy are able to grasp the simple fact that we are now in the early stages of a full blown global energy crisis. The focus is currently on oil but this will soon turn to concerns over natural gas and coal supplies.

This crisis has been turned into a state of emergency by the indifference of political leaders in the UK (and throughout the world), fluttering in the wind of poorly informed public opinion while they have prevaricated about expanding renewable energy resources and building new nuclear power stations. All warnings of this pending energy crisis have been ignored in favor of pursuing popular policies that created the illusion of prosperity whilst the fundamentals of our nation's security and well being have been draining away.

That's the fragile backdrop against which we need to consider the impact of a strike on Iran.

The worst case scenario is that a strike would finally push the needle firmly to stagflation, the poisonous pairing of stagnant growth with rising inflation.

On that front, perhaps nobody has written more pointedly than Nouriel Roubini:

Stagflation requires a negative supply-side shock that increases prices while simultaneously reducing output. Stagflationary shocks led to global recession three times in the last 35 years: in 1973-1975, when oil prices spiked following the Yom Kippur War and OPEC embargo; in 1979-1980, following the Iranian Revolution; and in 1990-91, following the Iraqi invasion of Kuwait. Even the 2001 recession -- mostly triggered by the bursting high-tech bubble -- was accompanied by a doubling of oil prices, following the start of the second Palestinian intifada against Israel.

Today, a stagflationary shock may result from an Israeli attack against Iran's nuclear facilities. This geopolitical risk mounted in recent weeks as Israel has grown alarmed about Iran's intentions. Such an attack would trigger sharp increases in oil prices -- to well above $200 a barrel. The consequences of such a spike would be a major global recession, such as those of 1973, 1979, and 1990. Indeed, the most recent rise in oil prices is partly due to the increase in this fear premium.

Mr. Roubini concludes that without such a jarring negative supply-side shock, global stagflation is "unlikely" because of robust growth from Chindia and other emerging markets.

That leaves us with speculating on the odds of a strike against Iran.

The Jerusalem Post reported Tuesday that former U.S. ambassador to the U.N. John Bolton said that Israel is likely to attack Iran in the time between the November presidential election in the U.S. and the inauguration of the new president. Mr. Bolton also said that he does not believe the U.S. will participate in the attack.

That's not the tone struck by CBS. It reported Tuesday:

Israelis are mounting a full court press to get the Bush administration to strike Iran's nuclear complex.

CBS consultant Michael Oren says Israel doesn't want to wait for a new administration.

"The Israelis have been assured by the Bush administration that the Bush administration will not allow Iran to nuclearize," Oren said. "Israelis are uncertain about what would be the policies of the next administration vis-à-vis Iran."

Israel's message is simple: If you don't, we will. Israel held a dress rehearsal for a strike earlier this month, but military analysts say Israel can not do it alone.

"Keep in mind that Israel does not have strategic bombers," Oren said. "The Israeli Air Force is not the American Air Force. Israel can not eliminate Iran's nuclear program."

The U.S. with its stealth bombers and cruise missiles has a much greater capability. Vice President Cheney is said to favor a strike, but both Mullen and Defense Secretary Gates are opposed to an attack which could touch off a third war in the region.

It's easy to see why I still consider the Iran strike issue to be the most pressing geopolitical concern for investors.

Comments

[Brian Pursley]

There are no implications. Israel is going to bomb Bushehr, Natanz, and Arak, not blockade the Straight of Homuz.

[Aly-Khan Satchu]

I wrote this Friday.

US says Israel exercise seemed directed at Iran: report
afp.google.com/article...

US officials say a major military exercise carried out by Israel
earlier this month seemed to be a practice for any potential strike
against Iran's nuclear facilities, US media reported Friday.

More than 100 Israeli F-16 and F-15 fighter jets took part in
maneuvers over the eastern Mediterranean and Greece in the first week
of June to gear the military for long-range strikes and demonstrate
Israel's serious concern over Iran's nuclear ambitions, the New York
Times cited US officials as saying.

A Pentagon official briefed on the exercise said a goal of the
practice flights was to send a message that the Jewish state was
prepared to act militarily if diplomatic efforts failed to halt
Tehran's production of bomb-grade uranium.

"They wanted us to know, they wanted the Europeans to know, and they
wanted the Iranians to know," the Pentagon official was quoted as
saying.

"There's a lot of signaling going on at different levels."

Conclusions

This is lifting crude prices higher. It is curious that it was nearly
30 years ago that the Ayatollah was swept into power. I remember
watching the revolution unfold on the TV. I had gone to study at
Westminster School that very same year. The catalyst for the
revolution was best captured by
www.randomhouse.com/ac...
The Ayatollah was in France and as the Shah become more repressive,
every Friday he would send a tape which would be played in the
Mosques. The Shah began to feel very threatened especially when
Worshippers left the mosque of a Friday and one Friday, he sent the
hated Savak into the Mosques. The next Friday he was gone. The tape
said,
'He is an Infidel, he does not respect the holiest of places.'
The Peacock throne fell and on such seemingly trifling mistakes, Regimes fall.

The Iranian version of Shia Islam is deeply rooted in the idea of
Martydom and sacrifice. Millions of Iranians went to their deaths
against Saddam. The West still sees Iran through the Pahlavi prism,
because so many of them are in LA.

My point is this. It might make great TV lobbing a few well directed
missiles at the Iranians and my concern is that a President who sees
so much in a stark black and white, good and evil prism, nearing the
end of his tenure, it might seem a great exit option. It really might.
This would not be taken lying down by the Iranians and I think they
could really hold our feet to the fire in Iraq.

How Iran would retaliate if it comes to war
www.csmonitor.com/2008...

"If you attack Iran you are unleashing a firestorm of reaction
internally that will only strengthen revolutionary forces, and
externally in the region," says Ranstorp. "It's a nightmare scenario
for any contingency planner, and I think you really enter the twilight
zone if you strike Iran."

So what does such a scenario do to the Crude market? It creates a
potential super spike. How to exploit this? ONE TOUCH.

Aly-Khan Satchu
rich.co.ke

[lookit]

Attacking Iran would be yet another crowning mistake for the Bush administration. The American people do NOT want another "preemptive" war and if consumers are enjoying $4.50 a gallon gas, they'd love the dividend of an attack on Iran - $10 a gallon gas or more, not to mention driving even more Middle Eastern youth into the open arms of Al Quaeda. What is Dick Cheney smoking? Didn't the the (entirely avoidable) nightmare of Iraq teach him/them ANYTHING? I am starting to believe the religious right has prevailed upon this administration to bring about their longed-for "End of Days".

[Mike18]

Lookit: You are right about an "end of days" theology but it is not the Bush Administration -- it is the Iranian regime. And they don't even try to conceal that -- they celebrate it. Put nuclear weapons in their hands and you have a scenario MUCH WORSE than attacking them beforehand.

[mixter]

Bomb the bastards, the sooner the better. Bullies behave only when they have gotten their butts kicked! To hell with all appeasers! Get it over with now!

[Mandev]

Democracy in Iran was murdered after end of second world war, when Mr.Mosadagh, then
Prime Minister, was replaced by Mohd. Reza Shah Pahlavi.
Who did this? Iran and world would have been much better
place if this drama had not been enacted.

[UncleFred]

Israel will strike at Iran between the U.S. elections in November and Thanksgiving. Israel will be acting with the blessings of the U.S. neocons who have put the U.S. into a terrible situation worldwide with their short term thinking, and inept execution.

I have thought for quite some time that the Bush administration is indeed deliberately aiming the planet toward "Armegedon", and a strike on Iran by Israel will almost certainly take us there. It is IMPERATIVE that we all contact our congressional representatives to draft a bill that would SPECIFICALLY ban any military action against Iran without express congressional approval. Even then, the Bushies are planning an end-run in that contingency by using Israel to actually execute the strike. So to be effective, the bill would need to specifically state that aid to Israel will be terminated should they strike Iran.

With or without a strike on Iran, oil prices are only going one direction, and that is up, long term. Striking Iran will only accelerate that trend.

[redbaron]

Great article, but what does that mean for US investors? The article, and all the above comments, all seem to agree that oil is going higher either way, strike or no strike. Where are the contrarians?

I also think oil is going higher, but for different, more simplistic reasons, i.e., global production is not keeping up with global demand. Or said differently, decaying global production, is not keeping up with demand, in spite of decreasing demand. Or, global demand is now decreasing, but not as fast as global production.

If there is another view, wish it would show up here now. If there are no dissenting views, should one consider the opposite position for investing decisions? Contrarians, where are you?

[oil baron]

General Curtis LeMay, when approached by several of the pilots under his command to register concern about the 10's of thousands of civilians they were killing during the carpet bombing of Tokyo responded, "kill enough of the bastards and they will eventually quit fighting" and he was correct. The Japanese were fatalistic about death, as are the radical muslims, until they saw the results of the A-bomb over Nagasaki and Hiroshima. Maybe we should learn a lesson from the General.

[paulk8756]

If I understand your thesis, you believe we may have some respite from skyrocketing energy prices in the near term, but there will be even higher prices (...and chronic shortages?) in future years.

I believe it is more likely that just the OPPOSITE will happen. In the short term (...1-3 years), prices may recede toward what oil analysts call "equilibrium,&quo... give or take about $75 a barrel.

Longer term, there will be MANY more substitutes for conventional oil in its primary use as a transportation fuel. And prices for these alternatives will drop sharply over time, as well.

[lookit]

BTW, we are all forgetting some recent history - in 2003 the previous Iranian administration reached out to the Bush Admin via the Swiss embassy wanting to open up a dialogue with the US about a host of issues - including their nuclear program. The response? The Bushies told the Swiss to "mind their own business". Our policy of refusing to deal with a country because we don't "like" them reminds one of a petulant child. Whether we like it or not, Iran IS a regional power (and the situation in Iraq has only made them stronger). Our military is stretched to the limit - recruiting standards have been lowered, those in active service are worn out - some on their 3rd and 4th tours. 45 year-old National Guardsmen who signed up for "two weeks a year" are watching their mortgages and marriages go down the drain as they serve in Iraq. The administration can't be contemplating opening up a THIRD front. (And hey - whatever happened to Osama bin Laden anyway? weren't we supposed to get him?!)

[Mmarrkk]

Thank goodness you weren't around in the 1940's lookit. With your views, we would never have been able to take on the Nazi's in WWII. But we were successful in WWII and could be here, if the gloves were taken off! One bomb would be enough.

[sara21]

Article do not talk aboutI possible consequences of bombing Iran. Mostly justification/hate. Who gave Iranian nuclear technology? AQ Khan of Pakistan and what we have done to punish Pakistan?
It seems bombing Iran will be like punishing ourselves. Oil supply will go down so much that oil price will be astronomical and if Iran, Iraq and Saudi oil facilities will get damaged so much that it will take years before we can have oil supplies back to normal. Economically IT WOULD BE SUCIDE FOR USA AND WORLD.
Hope and Pray real cooler heads prevails insead of Cowboys/Macho.

[Malkiel]

If I heard it correctly, there was the astounding statistic recited on CNBC international a couple of days ago that 250,000 new cars are being put on the road every week in China. One assumes similar modernization is going on in India and the Asian tiger countries, so reduced demand seems unlikely in the long term.

As for Britain, any country in the European social democratic tradition has the political will to use governmental policy to bring effective alternative energy products to the market if they feel the need. Using government research money, taxation benefits, and regulation to get individual homes off the energy grid through wind and solar utilities is so technically feasible that a concerted effort by a central government to pursue that would solve any transport fuel deficit they might be having.

[sara21]

comment on Mmarrkk. We all wish it was that simple i.e. one bomb. Look at Iraq. It was supposed to be a cake walk. Super military power is bogged down for longer than second world war and NOBODY specially who started it can tell when it will end.
One should think thru worst consequences of the action before taking action.
Actually Iran became stronger because of our invding Iraq. Now same experts wants to bomb Iran!
We were able to resolve Nuclear Russia-country who had and has the power to send nuclear missile anywhere in the world.
By engaging North Korea it seems we can resolve it without bombing.

[paulk8756]

Yes, that's the benefit of skyrocketing oil prices. Substitution for oil and and its uses will become the norm. As for 250,000 new cars being sold each week in China, that would amount to 13 miilion each year, or a little less than the number sold in the U.S. That sounds farfetched right now, but not in the future. However, it's doubtful they'll run on gasoline.

[dollarbear]

Good piece. Seeking Alpha contributor Jerry Slusiewicz wrote today about who is exactly is an oil "speculator."... Interesting piece.

www.greenfaucet.com/ec...

[billp37]

We are are likley facing global energy shortages.

We're tracking future electic supply and demand in New Mexico.

www.prosefights.org/pn...

The Persians may view the efforts to halt their nuclear efforts to generate electricity as an attempt to freeze and starve them to death in the dark?

Let's all hope for peacefuly settlement of these unfortunate matters.

www.google.com/search?...

[raytayzmd]

...Nariel Roubini????...and what is Mr. Roubini's track record at economic predicting?...for that matter, when was the last time an economist successfully predicted anything?

[paulk8756]

Yes, since the Governor of New Mexico doesn't favor the expansion of current technolgies (...eg. coal, nuclear, and natural gas) to generate additional electricity, I think it is safe to say you are facing serious future energy shortages there. Not to mention the diminution of your state's future economic prospects.

[paulk8756]

Now that you've got me thinking about it, that may well be the way this all ends up. With the stalemate over our present energy crisis in Washington, states that favor increasing their conventional energy resources may fare alot better economically than those which don't. There is at least anecdotal evidence that this is already taking place.

[paulk8756]

California, Florida, Nevada, Ohio and other states that don't produce sufficient energy are already hurting alot more than states like Texas, Louisiana, Utah, North Dakota, Montana, Iowa and Wyoming, which are net exporters of energy. This is evident from their house prices, unemployment rates and their state budget surpluses.

That's interesting...!

[Shaggieman]

Seems like America created this mess by arming Israel with nukes. So why don't the Israeli's offer to give up their bombs as part of the Iran no nuke deal? Then No middle east country will have any nukes. I think Iran would agree to that offer but I guess Israel would never trust America with it's security.

[jhm47]

I find it very strange that the Dems oppose nearly all drilling, coal, nuclear development, etc. Yet, they are unanimous that electric and hydrogen cars are the answer. In reality, electric cars will need to be recharged. Where do they propose to get the tremendous amount of electricity that will be needed, if they won't allow new coal-fired, or nuclear generating plants to be constructed? And---it takes electricity to break the bond between the molecules of water. This will also take tremendous amounts of added electrical generation. Just where do the Dems think that this added energy will come from?

[paulk8756]

Jhm,

We'll have to ask the Wilderness Society. That's where the D's in Congress get their marching orders from.

[paulk8756]

Shaggie,

You can look it up, but I believe the Israelis developed nukes on their own, just as the Brits and French did. Indeed, I don't believe we've ever shared our nuclear technology with anyone (...except the Russians, who are widely believed to have stolen theirs from us).

As for trusting our government, would you??? As the old saying goes, "I'm from the federal government, and I'm here to help you." Yeah, Right!!!

[paulk8756]

Speaking of trusting our government, when Eisenhower proposed the Alaskan National Wildlife Reserve (ANWR), the Alaskans made us promise they could develop the oil and gas resources there anytime they wanted to. So much for trusting Uncle Sam...! They should have gotten it in writing...!

[paulk8756]

Montanans were smarter. When asked to join the Union, they made us sign a CONTRACT saying they could leave if we ever abridged the gun rights of our citizens. With the DC gun law now before the U.S. Supreme Court, their legislature has already adopted a resolution to rescind Montana's statehood just in case this gun ban is upheld.

P.S. I've been looking for somewhere to move if things get much worse. If Montana declares their independence, I'll be the next one to move there. (And, as a bonus, they're next exporters of oil, gas and coal. Think of how much money they'll save just not having to put up with the frivolous environmental lawsuits!)

[Kunst]

Let's see, it's OK for Israel to have nukes but not Iran. That's based on what?

Anybody ever heard the term "waging aggressive war"?

[paulk8756]

It doesn't really matter whether the Iranians develop nuclear weapons or not. The Israelis will destroy them, just as they have previously attacked nuclear weapons sites in the Middle East they believed could pose a threat to them. Can you imagine THAT spike in oil prices?

[Brian Pursley]

Kunst: Iran (the so-called "moderate" Rafsanjani) has threatened to use nuclear weapons against Israel the moment they get them. Their national motto is "Death to Israel; Death to America." Israel has nuclear weapons but has never used them. That's the difference.

[oldtrdr]

Kunst.....excuse me, but I don't recall Israel EVER denying any of the Arab countries' "right to exist".....unlike the converse. (And nope, am not Jewish).

paulk....regarding to the 250k cars a week in China not running on gas/diesel...what are they going to do, harness pigs and hook 'em to the front bumper? I'm assuming you're talking about electric/hybrids....ex... China can't keep up with electrical demands for their economy at THIS point, and they're trying to grow the economy....

Jan

[Kunst]

If we could coexist for 40+ years with the Soviet Union, there is no reason to believe that Iran is going to take its first nuclear weapon and use it against Israel, assuming it even has the delivery capability.

You can't just go around attacking any country you decide is a (verbal) threat to you. Hurling words is different than hurling bombs. He who does the latter will justly be condemned as the aggressor.

Pursley: Provide a source for your statement that "Iran (the so-called "moderate" Rafsanjani) has threatened to use nuclear weapons against Israel the moment they get them." Given other comments you have made on this board, you have no credibility with me.

[nova]

It is easy to start a war but successfully end one is a totally different matter.

Do not go too far. Just ask
* Willy Kaiser from Germany (WWI)
* Nickolas II from Russia (WWI)
* A. Hitler from Germany (WWII)
* Mussolini from Italy (WWII)
* J. Stalin (WWII. 44 millions soviet people were slaughtered. Well, he did not care...)
* The Emperor of Japan (WWII)
* L. Johnson (Vietnam)
* L. Brezhnev (Afghanistan)
* G.W. Bush (Iraq. OK, this one is too stupid to understand the consequences...)

Remember. Something terrible always happens during any war. This how Britain and the USA became empires: by making somebody else fight wars and benefiting from war participating parties destruction.

[nova]

Israeli are not that stupid to start a war with Iran.

Yes, Israel might have 100 nukes. But it will take only 2-3 nukes to wipe out Israel and all its people from a face of the Earth.

[crudeoilcrackhead]

"If we could coexist for 40+ years with the Soviet Union, there is no reason to believe that Iran is going to take its first nuclear weapon and use it against Israel, assuming it even has the delivery capability." Kunst
Kunst please explain this comment. I fail to recognize any similarity between Soviet/U.S. relations and Israeli/I ranian relations. It is as if you are saying that just because no nuclear exchange happened durring the cold war that we should expect nothing to happen between the Israelis and Iran. I fail to understand this reasoning. I fail to understand how the two situations relate to each other.

[bill d]

So Kunst doesn't think Iran will try to destroy Israel the first cahnce it gets ???
Got you head up your butt wondering why it's dark ???
Is Iran not on the record, publicly,etc., vowing to destroy Israel ?
I'm not Jewish either but I'm beginning to question your ethnic direction. Or maybe you work for GE.

[User 132823]

Israel does not have the balls to attack Iran. Stop scaring people about Israel this and Israel that, and sending the price of oil to unbelievable levels. If this saber rattling goes any further, the price might hit $ 200.00 per barrel, then the whole world might just finish off Israel. The life of the people on this earth i