Is Threat of Iran Attack Raising Oil Prices?

There are two questions being asked around the global water cooler these days, and no one seems to have a very good answer for them. First, why does the price of oil keep rising, even if the world economy is slowing down and the Saudis appear to be willing to raise production? Second, why do so many analysts and governments think that the United States or Israel, or both, will attempt to destroy or set back the Iranian nuclear program sometime before George W. Bush's departure from the White House early next year? While there is a early infinite number of answers available to both of these questions, this writer likes one: it lies in the link between the two questions.

Obviously there is no single explanation for the astonishing and persistent rise in oil prices, recently hitting more than $140 per barrel. But one explanation may well be that energy traders and even real consumers, including refiners, companies and governments, are betting on an American-Israeli intervention against Iran in the near future, and logically believing that such an act would drive oil prices sky-high. While the American, Israeli and increasingly European attitude of turning up pressure, sanctions and threats against Tehran may well be the best way to both avoid military action and ensure that Iran does not acquire nuclear weapons, it has the unintended consequence that some people may actually believe it. Speculators and others may be acting on the assumption that Washington and its Israeli ally will proceed to "take out" Iranian nuclear facilities, because that is exactly what Bush and his allies are implying will happen if the Ahmadinejad regime does not comply with U.N. resolutions.

What would happen if such an intervention were to occur? To begin with, Iran would almost certainly suspend most or all of its oil sales abroad in retaliation; that would remove a couple of million barrels from the current worldwide supply of roughly 85 million barrels per day. Then—and this is crucial—Tehran's increasingly close ally, Hugo Chávez in Caracas, would in all likelihood at least stop sales to the United States and possibly declare a general suspension of sales. There go another 1.5 million barrels per day, though PDVSA, the Venezuelan state oil company, claims it is exporting substantially more today (showing, by the way, that in today's global economy, it is not that easy to know exactly how much each producer is placing on the world market). Finally, it would not be impossible for other exporters, out of tongue-in-cheek solidarity with Iran (applauding the American-Israeli move in private while giving lip service to international law in public), to remove an additional million or so barrels per day from the global market. Prices would in all likelihood break through the $200 ceiling, and maybe go much higher.

Would this be cutting off the noses of Iran and Venezuela to spite their faces? In part, of course, but it would not be very different from the 1973 Arab exporters' boycott of oil sales to industrialized countries in the wake of the Yom Kippur war in the Middle East, which multiplied prices by four. Both Tehran and Caracas, at least, have monetary reserves to sustain a boycott for a while, especially if they cheat and make spot sales at inflated prices. True, they could not maintain this stance indefinitely, but do the Republicans really want to begin the autumn election campaign with gas at $6 per gallon—a 50 percent increase from today's already high prices—and a crisis on their hands in the Persian Gulf and Latin America?

On the other hand, the window for doing something about Iran will not remain open forever. The more time that goes by, the closer Tehran will be to both producing a nuclear device and having the capability of delivering it in the neighborhood. It seems highly improbable that an Obama administration would like to kick off its first term with a surgical strike against Iran; nor does it seem plausible that Israel would move on its own without U.S. acquiescence. Those who fear a nuclear-armed Iran (French President Nicolas Sarkozy said in June in Jerusalem that such a notion was unacceptable) have rapidly diminishing room to maneuver.

This certainly explains the disinformation, feints and bluffs the world is witnessing on oil markets, in Mediterranean airspace (where Israel "secretly" carried out a "dry run" attack on Iran in June) and in technological, financial and commercial exchanges between Iran and the rest of the world.

There is a theory that the Iranian nuclear program is in fact much less advanced than many believe, mainly as a result of constant sabotage and assassinations, as well as disruptions of deliveries and purchases, all carried out by Western intelligence services. This views holds that financial sanctions, undercover operations and the Israeli efforts to drive a wedge between Iran and its allies in the region, particularly Syria, may suffice to restrain Iran from gaining nuclear weapons, for now. On one condition: that Iran and others believe that the military option remains on the table. But if they believe it, energy traders will, too, and oil prices will react accordingly.