Oil Boom!

Some very interesting—and quite menacing—dynamics are involved in the games being played in that most pleasant of watering holes, the Middle East.

The players are the usual suspects:  Iran, Israel, the US and Russia.  But, there are a couple of new players on the board, shifting alliances, and vague intentions, all bringing new wrinkles and new goals to the game.

But there is one common denominator…

Oil…Or rather, the price of oil.

It looks as though the Mideast is having a block party—or a brawl--and anybody who’s anybody is invited.

The latest moves involve Iran refusing to sell oil to the UK and France (and a few other European nations), but also Japan, China, and Saudi Arabia.

Why?

Well, let’s start with the UK and France...

Both of those countries are part of the economic sanctions against Iran to thwart their quest to produce a nuclear weapon.

And both have naval forces in or around the Strait of Hormuz, alongside the much larger American naval presence.

The sanctions, as well as the fear of an imminent attack, are really hurting Iran’s economy…

And it really is getting quite desperate.

For example, inflation has become rampant in Iran the past few months.  The official inflation rate is 21%; but some say the real inflation rate is about 50%.

The rial, Iran’s currency, has lost 50% of its value against the dollar since December, and unemployment is around 11%, although those numbers may be underreported as well.

So Iran has retaliated by shutting off the oil tap to both of them.

Unfortunate?

Yes.

Understandable?

Certainly.

Besides, Iran can always sell its oil to China, whose demand is increasing year over year as its economy grows ever more thirsty for the dirt cocktail.

But, since Iran has cut off oil sales to Europe, China knows that Iran needs to replace those oil revenues.

China will be happy to buy more Iranian oil, but will try to drive down the price it pays.

On the flip side, in the wake of the Fukishima nuclear disaster, Japan has taken most of its nuclear power plants offline.

This means that the Japanese must now import much more oil and natural gas to meet their energy demands; much of it from…yep, that’s right, Iran.

Iran’s Nuclear Shadow

Now, add to this the recent decision by Saudi Arabia to cut oil production in response to the situation, even after they pledged to the US not to do just that a few weeks ago.

Why would they change their minds?

Well…Six weeks ago, Iran warned the Saudi’s not to raise their oil production…

And now they are not.

The result?

Oil prices are rising.

But why would the Saudi’s worry about what Iran wants them to do?

Is it possible that the Saudis are hedging their bets in the region, as the shadow of a nuclear armed Iran stretches their way?

Do you think that the Saudis might have concluded that Iran will in fact end up with nuclear weapons…

And they may have also decided that today , the US is a less reliable, less powerful ally than in the past.

There is certainly evidence that the US is less determined to stand by allies when times get tough…

Do you think they have forgotten the hard lesson of the US and Egypt?

The take away there is clear:  The US will abandon their allies—even strategic ones like Mubarak--when things get tough.

But the Saudi’s aren’t the only ones to learn that lesson.

What do you think Israel is thinking?

If the US is willing to cast away the leading nation in the Arab world as an ally, the keystone to any kind of Arab-Israeli peace arrangement…

In favor of fundamental Islamic rule in Egypt…

What’s the advantage for America of defending Israel now?

What real security options does Israel have now?

Yes, there is the largest US naval presence in the Straits than ever before…

But for what purpose?

US Credibility Low

Is it to intimidate Iran, protect Israel, or to attack Syria, which is in its revolutionary throes?

Perhaps it’s all of the above…

But with the Mubarak example in Egypt, the Israeli’s must ask themselves a tough question…

Where is their guarantee of American support and defense?

I’ll tell you where it is…

In the gutters of Cairo.

That’s precisely why an Israeli strike on Iran’s nuclear sites is expected by both the US and Iran this spring.

Of course, if that were to occur, the price of oil would likely go very high very quickly.

In fact, the price of oil may be already reflecting that event.

The price of oil is higher for this time of year than ever before.

But there is also an effect on the US domestic political scene.

It is an election year; just how high can the price of oil go before it threatens the Obama Administration’s re-election?

Given that reality, it may just be that the US naval battle groups are there to “restrain” Israel from attacking Iran—at least until mid-November--as much as for other reasons.

And speaking of navies, the Iranian navy has just pulled into port…in Syria.

Well, it is a block party after all…just so everyone gets to know one another real well.

Throw in Russia’s vow to defend Iran and Syria against any US or Israeli aggression, and China’s voiced support of Iran as well, and the Mideast has all the makings of a Molotov cocktail…

Or, an oil boom of a different sort.

And those are…The Gorrie Details.

Related posts:

1. Oil Prices Will Hike in 2012
2. A Familiar Rumor of War
3. Nuclear Iran: The Next Super Power?
4. The Gold Axis
5. How Trend Followers knew the Commodity Boom was Over Months Ago

Other posts by James R. Gorrie