Oil Price Implications of a Strike on Iran 44 comments
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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? 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. 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. 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. Israelis are mounting a full court press to get the Bush administration to strike Iran's nuclear complex.
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:
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:
That's the fragile backdrop against which we need to consider the impact of a strike on Iran.
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.
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:
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.
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.
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:
It's easy to see why I still consider the Iran strike issue to be the most pressing geopolitical concern for investors.
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.
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This article has 44 comments:
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
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.
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.
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?
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," 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.
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.
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.
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.
www.greenfaucet.com/ec...
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?...
That's interesting...!
We'll have to ask the Wilderness Society. That's where the D's in Congress get their marching orders from.
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!!!
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!)
Anybody ever heard the term "waging aggressive war"?
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
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.
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.
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.
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.
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.
If Iran is trying to get a nuclear weapon -- which is not at all clear -- the likelihood of it actually attacking Israel, which is in a completely different league militarily, seems quite low to me. Iran (Amadinejad in particular) likes to bluster, but actually seems fairly realistic when it comes to action. I am less concerned about them instigating hostilities than Bush or Israel. Of course, the attacker always wants to claim it was forced to do it, just like our invasion of Iraq (Saddam Hussein was developing nuclear weapons too, wasn't he?). Others' comments about how much easier it is to start a war than end one are worth careful consideration.
Have you noticed a tendency on our (US & co) part to demonize opponents in order to pave the way for military action? Is that the only solution to all problems?
Again, we have a tendency to absolutize situations and demonize opponents to justify immediate, drastic action that may be unnecessary and unwise. Haven't we learned anything from Iraq?
I would debate your comment that communication between the Soviets and the U.S. were poor. On the contrary it was quite open. Kenedy made sure that relations would be kept open have our little Cuban incident. We also had relations through a host of other countries that were not happy about the possibility of a nuclear exchange. You say that have we learned nothing after Iraq, but should that be a suprise? On the contrary the U.S. has an amazing track record of destabilizing and outright overthrowing governments. This is not likely to end. You would be hard pressed to find a government in S. America we haven't removed at least once or tried to. Wars for oil will continue in the future, they seem to be unavoidable. The current administrations lack of communication with Iran is worrysome. We always engaged the Soviets, no matter who was in office. The unfortunaye thing is that through the lack of communication and by ostrasizing the Iranians we seem to be overnight creating an Iranian, Russian, Sino alliance, both economically and politically.
Don't forget, the entire Arab/Muslim world denied Israel's right to exist at one time. Most of them have come around to accepting it. Iran and its surrogates (Hezb'allah, Hamas) will eventually too. Israel isn't going anywhere and everyone knows it. The current situation is uncomfortable enough for all in the region, including Israel, that some kind of agreement and acceptance will come about sooner or later. Yes, religion complicates things, but that's just how it is. A lot of the harsh talk is positioning for eventual negotiations.
Iran is in many ways a secondary player in all this, neither Arab nor a neighbor nor Sunni. Ahmadinajad likes to talk but that's about it. Remember that he is far from the real power in Iran and has declined since he came into office. From what I read, much of the younger generation would like nothing better than the mullahs to disappear and relations with the US to improve. It is so complete against Iran's interests to attack Israel that I just don't believe this is a realistic likelihood. Nor does an attack on Iran serve Israel's interests. It will be condemned almost universally as unjustified aggression. And the US will be blamed for it, as Israel is widely seen as our client state/ally.
The last thing the US needs is another war in the middle east.