This
and other three texts below contain short summaries on the status
of the nation states that now have, and will in the future, the greatest
effect on oil prices. They have been kept separate from the body
of the report The
Future of Fuel Prices because
they are essentially political in nature.
Iran
is unquestionably the world's top boggyman at the moment. And though
the nuclear threat is serious, it is essentially unknown (at least
publicly) just how serious it is. However, there can be little doubt
but that much of her sabre-rattling is directed at driving up the price
of oil based on speculative fears. Indeed, this has for a time worked
nicely.
Iran is
said to be No. 2 in world oil reserves, even by our own Department
of Energy, which accepts OPEC numbers at face value. There is much
evidence to cast grave doubt on this assessment. Iran and its oil industry
are in deep trouble. The last reliable survey of Iranian reserves occurred
in 1974 prior to the Islamist take-over which placed reserves at 62
billion barrels. Since then the number has been increased to 132 billion
with virtually no evidence to support any of these increases; these
are simply the numbers claimed by Iran to OPEC, used to support its
OPEC quota allowance.
Iran's oil
industry was badly damaged in its war with Iraq. To this day much of
that damage has not been repaired. The ruling mullahs essentially control
the oil production and their ignorance has resulted in severe mismanagement
and damage to the oil fields. They continue to pump oil without regard
to the damage they do. The mullahs are paragons of paranoia and will
not allow any foreign involvement. Therefore, it is widely believed
that Iran's existing fields will soon near exhaustion and most are
certainly already in decline.
While Iran
has tried to attract new capital and investment (as it does not have
the resources on its own), its involvement in terrorism and behavior
as an international pariah has dissuaded anyone but China from getting
involved with them. To the extent that their behavior has only gotten
worse, the future of Iranian oil is dark indeed.
The fact
that Iranian oil is in decline, combined with her nuclear ambitions,
suggests that Iran is seeking territorial expansion, or territorial
hegemony at best. And what better way to do that than to seize someone
else's oil fields. In this respect, Iraq is a threat to Iran since
Iraq could jump ahead of Iran in terms of quotas, and hence revenues,
if Iraq gets her terrorist problem under control. Thus, Iran has a
strong motivation to foment Shia-Sunni unrest in Iraq, which is undoubtedly
part of Iraq's problem.
The Iranian
mullahs, through their promotion of terrorism and use of proxies, have
largely proved themselves to be timid loudmouths, big on talk but short
on action. Their pursuit of nuclear weapons is most likely for the
purpose of intimidation and blackmail. For the last 26 years they have
proven to be their own worst enemy as every word they speak and every
action they take serves only to isolate and impoverish themselves.
With oil prices tripling in recent years, they are ebullient, but hardly
flush. Their "economy," such as it is, is a shambles. We'll
see what effect the dramatically falling oil prices will have on their
wagging tongues since oil accounts for 40-50% of their economy.
All the
hullabaloo about the Iranian bomb could well be a red herring since
no one really knows what they are doing and how well they're doing
it. They're shooting off missiles all over the place in a well orchestrated
stage play intended to serve as a threat. But if they can't manage
their oil fields, their life-blood, there shouldn't be much concern
that they'll soon be making suitcase nuclear weapons or ICBM's. In
fact, all those TV videos are of missiles that are basically SCUDS
with Islamic names.
It is very
likely that as prices fall, their sabre rattling will increase in an
effort to instill fear into the oil market to drive prices up. As for
carrying out threats, they've shown no propensity for doing so in 26
years. They have a well-oiled propensity for using proxies. This only
creates a viscous circle for them since the more threatening they are,
the less likely they are to obtain any capital (or expertise) to improve
their declining oil production. Even the Chinese will be inclined to
back off should Iran threaten the Persian Gulf shipping lanes. Yet,
their declining production could serve as a motivation to do something
foolish, but I don't see use of a nuclear weapon as being one of them.
As for bombing
Iran, there is no chance that could happen until well into the first
year of a new presidency. George Bush isn't about start another war.
The
Most Serious Iranian Threat
It is little
remembered and never mentioned in the media that the U.S. fought a
brief naval battle with Iran in the Persian Gulf in 1987 following
what was called the tanker wars. The later occurred between
Iraq and Iran in the period 1984-88 when the two warring nations conducted
war on Gulf shipping, sinking 128 oil tankers and other merchant ships.
In 1987 when Gulf oil was severely threatened, President Reagan offered
to Kuwait to reflag their tankers under the US flag and escort them
through the Gulf. Iran at that time was mining the Gulf. A number of
escorted tankers hit mines followed by an attack by Iraqi aircraft
on the USS Stark with Exocet missiles. Thirty-seven US seamen were
killed. The object of all this was both sides seeking to cut off all
oil shipments by the two combatants.
Reagan retaliated
by destroying two major Iranian offshore oil platforms. In April, 1988
the USS frigate Samuel B. Roberts, escorting an oil convoy, struck
an Iranian mine, badly damaging the ship. In an operation designed
to provoke Iran, Navy SEALS destroyed two more major oil facilities,
producing the desired results. The Iranian navy launched an attack
on elements of a US carrier group. The result was the destruction of
eight Iranian warships in a single day. After that Iran decided it
was a no win situation and ceased hostilities.
The point
of this bit of history is that Iran knows very well how easily it can
stop all shipping on the Gulf. It has an obviously well developed plan
to use the Strait of Hormuz (34 mi wide at narrowest point) as a choke
point, demonstrated by known radar installations and missile emplacements.
Iran has geographic strategic control of the Straits by virtue of its
unique shape. Iran, Iraq, Saudi Arabia, Kuwait, Qatar and the UAE all
export oil through the Gulf, equal to about 40% of M.E. oil exports.
Iran's Supreme Leader Ayatollah Ali Khamenei warned last month (8/06)
that oil exports in the Gulf region could be seriously endangered if
Washington made a wrong move over Iran.
Since the
tanker war the US has often publicly made promises to protect the Gulf.
If any kind of shooting war begins with Iran, it will surely erupt
at this point. A quick analysis of Iran's potential for shutting down
the Gulf oil shipments suggests that the US would have a tough time
destroying Iran's shipping threat. Intelligence sources indicate that
Iran has well conceived plans to do just that.
The net
effect on oil prices of such an event would only be temporary, as any
action by Iran would attract several carrier groups with swarms of
aircraft. Iran's geography in this area is entirely desert, but it
would still take at least a month to destroy Iran's threat to oil shipping.
Back
to The Future of
Fuel Prices
Posted
September 27, 2006
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