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Iran is Now a Full-Blown Crisis

by | published February 3rd, 2012

Just when it looked like we could take a breather from the Strait of Hormuz, all attention is back on Iran.

There are three reasons for this – all happening within the last 24 hours.

  1. First was Tehran's successful launch of a satellite, viewed by all in the region as being for military intelligence.
  2. Second, in his toughest talk to date, Iranian Supreme Leader Ayatollah Ali Khamenei voiced defiance to Western sanctions and pledged open retaliation if they are instituted.
  3. Finally, yesterday morning, U.S. Secretary of Defense Leon Panetta expressed concern that, if matters continue, Israel could attempt an air strike takeout of Iranian nuclear facilities within a month. Iran has been frantically moving essential components of its nuclear program underground to withstand such an attack.

All of this is, once again, leading to a rise in crude oil prices.

This morning, crude had been rising three times quicker in Europe (Brent benchmark rates) than on the NYMEX (West Texas Intermediate, or WTI, benchmark rates).

The E.U. decision to stop importing Iranian crude starting July 1 will cripple any chance Tehran has to combat escalating economic and political turmoil at home. Yet Khamenei's defiant tone during his Friday prayer meeting speech indicates that Iran's religious leadership will not wait for the system to unravel.

And that makes this both a full-blown and an intensifying crisis.

So what's being done?

Washington has little effective leverage, save its ability to temper an immediate escalation by Israel (leverage the U.S. can still apply, at least for the moment). It also has some indirect influence on what the E.U. does.

Meanwhile, Saudi Arabia also is a wild card. It will not tolerate a nuclear Iran.

And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.

Some elements of that process will be available earlier, but remember: A weapon is of little value unless it can be controlled and delivered. The logistical and infrastructure considerations need to be in place first.

Yet with such an inevitable conclusion staring them in the face, the West has decided to embark on a risky path…

The target here is not the nuclear project at all (over which there is less and less outside control). Instead, it has become about creating massive domestic instability to bring down a regime.

Now, this is not about ending the theocracy. With or without Mahmoud Ahmadinejad as president or Ali Khamenei as supreme leader, Iran will remain a Shiite-dominated country. Religion decisively controls politics, and the clergy oversees the society.

The West is seeking a more moderate application of what will remain the Iranian cultural reality.

However, as the brinksmanship intensifies, so will the price of crude oil. Tehran, in this dangerous game of international chicken, really only has one card to play – the Strait of Hormuz.

There has been much misinformation circulated about the strait. Here are the facts.

On any given day, 18% to 20% of the world's crude oil passes through it. The narrowest point measures barely two miles across.

Of greater significance, though, is the fact that most of the world’s current excess capacity is Saudi. (This is the oil that can be brought to market quickly to offset unusual demand spikes or cuts in supply elsewhere.) And, unfortunately, Saudi volume must find its way through the same little strait.

If we're unable to access the Saudi excess, that loss guarantees the global market will be out of balance. That will intensify the price upsurge – an upsurge that is already happening.

Now for the question I’m being asked several times a day in media interviews…

Just How Bad Can It Get?

If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel… within hours.

Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve.

In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel.

Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.

Now let me put this in perspective for you…

A $1 rise in the price of crude translates into a 3.6-cent rise in the cost at the pump. Within the first week of the strait closure, therefore, pressures in the retail gasoline market will be push the price to an average of $6 a gallon.

After one week!

There’s no doubt that this will paralyze economic recovery on both sides of the Atlantic. (Delivery costs on everything will go up, and diesel prices will rise quicker than gasoline.) This is apparently what Khamenei has threatened.

All energy options will be on the table, from alternative energy to tapping Canadian oil sands (and approving pipelines to transport it south), moving from gasoline to compressed natural gas for vehicle fuel, and a range of other possibilities.

Of course, none of these options can move quickly enough to stave off collapse.

Now, there is no guarantee any of this is going to happen. But the uncertainty is moving oil up today. And the uncertainty will remain in the market as we come closer to July 1.

That gives us some space to develop the investor’s reaction to events.

What It Means for Us

Nothing happens until the beginning of July on the European oil embargo, but the markets are hardly going to wait that long.

I am off to London for meetings on the crisis at the end of this month, followed by the annual session of the royal chartered Windsor Energy Group at the castle of the same name, and then on to Scotland for a presentation at the U.K. Energy Policy Center. This crisis will be the center of attention at all these get-togethers, and I will be taking you along with me.

So how, as investors, do we respond to this?

I think it requires a rebalancing your portfolio, as well as revising your exposure to both corporate dividends and the commodity value of oil and gas.

As we move forward, I will be outlining some aspects of that strategy here. If you're looking to benefit from specific stock recommendations, please join my Energy Advantage subscribers. (Click here for more information.)

Sincerely,

Kent

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  1. Barry Watson
    February 3rd, 2012 at 16:20 | #1

    Kent,
    You have said that the Saud Oil has to go through the Straits of Hormuz.

    Years ago (1980s approx,)the Saudis built a pipeline from the Ghawar Field in the Gulf to Yanbu on the Red Sea coast. Yanbu is a crude oil tanker loading terminal.

    Last year (2011) everybody was saying that the Saudi crude oil reserves have not changed for the last 10 years which is unbelievable. Now they are going to make up any deficit caused by the possible future Straits of Hormuz Crisis. This is also suspect if the above mentioned reserves have not depleted over time.

    Also, Iran has to send its own oil out through the Straits of Hormuz, so the blocking of the straits will have to be very selective for Iran.

    Regards

    Barry

  2. Simon Miller
    February 3rd, 2012 at 16:57 | #2

    The coming oil constriction Dr. Moors guaranteed didn’t arrive as expected, any reasons why? The likelyhood of the Strait being closed is rather low given the US Navy presence. Reserves have been built up, and Oil is already at a very high price to factor in the Iran situation. The rise in Oil was more likely due to the jobs numbers, rather than any change in the daily Iran rhetoric.

  3. George
    February 3rd, 2012 at 17:32 | #3

    If gas jumps to $6/gallon, I think that would seal Obama’s defeat in the November election. He has to be the most inept president we’ve ever had, at least in my five decades.

  4. R.Bunting
    February 3rd, 2012 at 17:44 | #4

    All this talk of Iran closing the Straits is interesting. In the 1980′s ,Arms Contractor ,Marconi systems, installed a huge defensive set up in Oman because traditionally Oman controls the straits.
    I haven’t seen anything to in the last 30 years which indicates that this has changed. Will Oman be called upon to use these defensive weapons against any iranian vessel attempting to blockade the straits?
    Will Oman be the launching pad for a war against Iran ?

  5. Dennis Miller
    February 3rd, 2012 at 18:22 | #5

    If this is all to happen then what about all the oil that the US is now exporting? Why? I read that in May there are suposed to be new oil wells coming online also? I feel the world should call their bluff, too many nations depending on oil and will do anything to get it!

  6. Benton H Marder
    February 3rd, 2012 at 18:53 | #6

    Do we realise that, if Israel does attack Iran, all bets are off. Iran will automatically assume that the USA is conniving at this attack, we having sent bunker-busting bombs to Israel. There is a passage in the Quran requiring attack upon aggressors and upon all them that aid the aggressor. If Saudi Arabia connives at this attack, the oil fields and ports will also be attacked. Further, much of the population of that part of Saudi Arabia is heavily Shia, forming a possible Fifth Column. Attack Iran, and all bets are off.

  7. February 3rd, 2012 at 20:44 | #7

    Do you know how Natural Gas is in cold weather. I know that a propane tank won’t even lite if its really cold. How Will that efect all the cars and trucks that goes to NG. Do uyou think that If Iran starts something, will that double the price of NG.

  8. Aussie
    February 3rd, 2012 at 20:52 | #8

    So let the battle begin!! It’s going to happen sooner that later..Later will be to late….Just like the time when the underground ask the USA to bomb the the rail lines to the con
    centration camps back in the early days of HITLERS NAZIS the west did nothing and look how many people DIED..NO do it now….

  9. Bob
    February 3rd, 2012 at 22:59 | #9

    There will be No July 1 date to finally introduce EU sanctions…and Obama has not instituted any either, he decided to use a 6 month waiver!

    Meanwhile Obama tells Israel they btter not attack Iran …not at least ubtil they give ample time for the sanctions to work…July 1 +6 months

    Israel says they are franticlly working to put it all under mountains at a feverish pace and already has finished much of this…everyday Obama forces Israel to hold off, will cause a less and less effective attack.

    If Isreal waits until Obama and the EU sanctions to be in effect for 6 months following July, Iran will already have Nukes!
    Isreal will not gamble its existance on Obama dithering any more…he had over THREE YEARS that he totally wasted saying he would negotiate away Iran’s desire for nukes!

    Iran has been allowed to run the clock down by Obama. it seemed Barack Hussein Obama practically gave the Islamic Republic of Iran, a “wink and a nod” that they can proceed and The US will not stop them, and furthermore, that Obama will keep his Knee on Isreal’s neck, demanding they stand down!…it still looks that way, even now, too!Obama will not stop, stopping Israel, until Iran does have their Nukes and the ability to make 5-10 nukes a year under their mountains in 50 locations!!!

    Iran is the biggest supporter of ALL Islamic Jihadist terror groups…how soon before some of these nukes will be coming to a city near you????

  10. scott thomas
    February 3rd, 2012 at 23:52 | #10

    So all bets are off!! That means all bets are also on and nothing remains off the table…Come…

  11. enthusceptic
    February 4th, 2012 at 10:21 | #11

    Iran has a point, because a “deal” where one part gets nothing is always a bad deal. If Iran can use nuclear to produce electricity with suprvision – not by the enemy USA – the problem should be solved? Maybe that is too late because the political temperature is too high? Now on CNN they talk about independent US experts..?!

  12. eric taylor
    February 4th, 2012 at 14:43 | #12

    The last two unpaid for war’s cost us Trillions of dollars,
    without adding in the unpaid for tax cuts, and the unpaid for
    loss of domestic content manufacturing. We know where all this
    debt is heading!!!

  13. James Heald
    February 4th, 2012 at 15:55 | #13

    There is another ignored strategy for dealing with Iran. Rather than target the hardened nuclear facilities, an alternate strategy would be to knock out Iran’s oil fields and pipelines which are open and generally visible. They can be attacked with conventional weapons and drones. It is this possibility which has the Chinese so upset because they would lose a significant source of oil. China is one possibility to make Iran less fractious. Bunker busters will have a limited effect on the Iranian nuclear development because Russia is secretly furnishing technology and equipment. Anything destroyed or damaged will soon be replaced. One question is how does Iran ship its oil? Through the Hormuz Straits? If so, how does Iran ship oil if they close the Straits?

  14. Fred Kay
    February 5th, 2012 at 00:13 | #14

    Nukes, religion and oil…how’s that for a witch’s brew from hell? It’s a pity that we seem so determined to ignore the challenge that could unite us all against a truly common enemy, climate change. But the show must go on at all costs, fuelled by the same old lies. Boys will be boys.

  15. larry mckissack
    February 5th, 2012 at 00:46 | #15

    too bad the price of freedom will cost people everything just to be free from the high market values the honkers feel they need to charge people ,its a shame we cant live with everyone getting along and live in peace

  16. georgeoram
    February 5th, 2012 at 10:17 | #16

    in our election cycle no less

  17. Mahmoud Rateb
    February 6th, 2012 at 02:45 | #17

    Psychology will drive prices up.Saudi has oil outlet on the red sea through its East west Pipeline(used mainly to supply the red sea coast refineries ) and the Iraqi Pipeline through Saudi Arabia which was annexed by Riyadh.I know it takes time to add a booster station or build a new pipeline but if the Iraqi pipeline is operational it can add up to a good 1.5 million B/d(You can use also viscosity depressants to increase the existing capacity as was used by Iraq during the Iraq Iran War).Not enough but with release from the strategic oil stored in US & europe in addition to filling up all tank farms For sure,the world can survive a full week or even more until the US navy is able to force the opening of the straight

  18. Jim
    February 6th, 2012 at 15:13 | #18

    Today, the number one EXPORT of the U.S. is gasoline…The prices at the pump are artifically inflated, based on this. Whether the strait is closed or not, prices are going to continue to rise.

  19. edwin
    February 7th, 2012 at 01:32 | #19

    hmmmm, maybe the world will end this year after all. the Mayan calendar ends this year too. so get ready for a big ‘the end’ party.

  20. February 7th, 2012 at 11:15 | #20

    If we quit looking the other way at the Israelis committing genocide on the Palestinians, seen how they got away with bombing the USS Liberty, held back info on the attack of the Marines under Reagan, and see how they call Jonathon Pollard a “hero” for stealing top US defense secrets, giving them to Israel that passed them on to Russians and Chinese we’d realize Israel is the aggressor and with their bombings and assassinations in other countries are the a terrorist regime.

  21. eric taylor
    February 8th, 2012 at 00:16 | #21

    I don’t know why Obama was given a peace prize before the fact, but
    at least he is slowly winding down the Bush wars in the middle east.
    With all of the specious intelligence information out there, it will
    be difficult to steer away from conflict with Iran, but remember how
    wrong we were with weapons of mass destruction in Iraq. Syria could
    be a bigger problem. It’s sad to say, but the closest thing to a Pan-
    Arab government is investment in one of a dozen and more terrorist
    organizations! Reagan would not likely have gone to war in the middle
    east, and we should tread more carefully there ourselves.

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