Sneak Preview of future battle with Iran?
Looking at the bigger picture, Hizbollah’s attacks on northern Israel might just be a sneak preview of the damage that Tehran can inflict on Israel and the global stock markets, if the United States decides to push tough economic sanctions against Iran. Despite being the world’s fourth biggest crude exporter, Iran is heavily dependent on gasoline imports because of its lack of refining capacity, and buys 440,000 bpd of gasoline from abroad, or 40% of its daily consumption.
Tehran could prove highly vulnerable to international sanctions on its gasoline imports. Iran’s gasoline imports are supplied by Swiss-based trader Vitol and India’s Reliance. Washington could go further with a naval blockade on Iran, halting its $54 billion per year of oil exports, or 90% of the Ayatollah’s income. The US has defended Israel’s air and sea blockade of Lebanon, to block the delivery of ammunition to Hizbollah, but also to gauge the local Lebanese reactions and attitudes for removing Hizbollah’s weapons from their midst.
The Saudi royal family is also criticizing Hizbollah’s actions, not out of love for the Jewish state, but out of fear that Hizbollah’s rocket attacks are the opening salvo in Iran’s war to “wipe Israel off the map.” Saudi Arabia’s All-share index has already tumbled by 50% since reaching an all-time high in February, losing $400 billion of market value, amid fears of a US-Iranian confrontation in the Persian Gulf.
Saudi Arabia’s King Abdullah said on July 25th, that Israel’s military offensives on Lebanon and the Palestinians could ignite a wider war in the region. “If the peace option fails because of Israeli arrogance, there will be no other option but war. No one can predict what will happen if things get out of control. Arab patience with Israel cannot last forever,” said Abdullah, seeking a quick fix for the Shiite uprising.
Would the US initiate a unilateral blockade of Iranian oil exports, recognizing that China and Russia would never agree to UN sanctions against Iran? The loss of Iran’s 2.4 million bpd of oil exports could be mostly made up by Saudi Arabia’s 2 million bpd of spare capacity. In addition, member states of the OECD have oil reserves of about 4 billion barrels, enough to cover the Iranian shortfall for several years. And without its $54 billion of annual oil sales, Iran’s economy could collapse, leading to massive unemployment, and a toppling the Ayatollah’s regime.
Under this scenario, the world might have to live with $80 per barrel for crude oil. But Tehran won’t take an oil embargo lightly, and would try to disrupt the flow of oil through the Strait of Hormuz, or 17 million barrels per day, to drive world oil prices to $100 per barrel or higher. Without credible economic sanctions against Iran though, the alternative is a military strike against its nuclear facilities, or a nuclear armed Iran. There just are no good alternatives, which is why crude oil is commanding a $10 to $15 per barrel “war premium.”
The last time the crude oil market commanded a $10 to $15 per barrel “War Premium” was in November 2002 thru March 2003, as the drum beat of war with Saddam Hussein’s regime grew louder. Yet at the moment US president George Bush presented Saddam with an ultimatum of war or exile on March 19th, the price of crude oil peaked, and began to collapse by 25% within a few days, even before the first bombs landed in Baghdad. Oil traders had correctly calculated that the war would end quickly, and without any damage to Iraq’s oil installations.
There is always a risk that the current $10 to $15 per barrel “War Premium” built into oil prices, due to fears of an eventual military confrontation with Iran, could evaporate overnight, if Iran’s Ayatollah flinches at the eleventh hour, and agrees to the UN incentive plan for abandoning the enrichment of uranium. But Iran is not Iraq, and the game of brinksmanship between the US and Iran, probably won’t be settled until after the US Congressional elections in early November.
