Iran's Oil Weapon Threat Ringing Hollow

Iran's mullahs have threatened an oil embargo in response to pressures exerted to accept curbs on its nuclear program — curbs that it has agreed to when it signed the Nuclear Non—Proliferation Pact. This agreement, and subsequent promises made to the International Atomic Energy Agency and to the European Union, have been broken repeatedly by Iran.

A clandestine nuclear program was discovered to exist in Iran, outside the purview of international inspectors. Iran has benefited from the nuclear smuggling ring of Pakistan's A.Q. Khan and from access to North Korea nuclear and missile technology. Clearly, Iran has a nuclear weapons program and it has made clear its intentions to unleash a genocide upon Israel.

Now the world is responding, albeit in faltering steps, as the UN Security Council pursues its mincing way toward dealing with the Iranian threat. Nevertheless, even these faltering steps have enraged Iran. 

The Iranians have not only taunted the world with a threat to restrict oil exports should action be taken against them, but have also made oblique references to blocking the export of oil from the Persian Gulf nations by use of military means. The narrow choke points in the Gulf could be attacked by the Iranians, at least temporarily halting the flow of crude.

Yet despite these provocations, the price of oil has been plummeting on world oil markets. Since the price of oil has a 'risk premium' built into it to reflect the geopolitical risk to oil supplies that come from the unstable Persian Gulf region, these increased risks (let alone the threat from another Israel—Hezbollah war) seem to be discounted by oil buyers. Why might this be so?

Two recent articles highlight some intriguing possibilities.

Max Schulz makes the point in National Review Online that Iran's threat to remove oil supplies is not as potent as it once was because of the 700 million barrel (and climbing) Strategic Petroleum Reserve (note, America does not import any Iranian oil but since oil is a fungible commodity traded world—wide, imbalances in oil supply and demand effect all oil importing nations).

This Reserve did not exist during the previous Arab oil embargo in 1973. Moreover, our economy is far less dependent on oil than it once was:  more than 85% of the growth in energy demand in the last 25 years has been met by electricity (only a small percentage of which is generated by burning oil). As our economy has moved towards a service economy we have moved away from a petroleum economy: a trend that will continue apace.

Michael Lynch, President of Strategic Energy & Economic Research, thinks that oil prices will continue to plummet as demand reflects slower world wide economic growth and, importantly, as vast oil supplies come on—line.

While new drilling techniques (horizontal drilling) and advanced recovery techniques have squeezed new life out of faltering fields (both the Alaskan oil fields and the North Sea have far out—produced initial expectations of their recovery potential), the huge new fields coming on—line now and in the future promise to blunt any Iranian oil threat.

Since 2003, industry spending on exploration and production has exploded from $169 billion to $277 billion in 2005 — 64% growth in just two years, with continuing growth since. This increased spending is making a big, and under—appreciated impact.

Just a few weeks ago, oil from a million barrel a day field in Azerbaijan started flowing through a new oil pipeline. Iran is also concerned that the Azerbaijan will aid fellow Azeris in Iran who have become  increasingly rebellious towards their Persian oppressors, incidentally, compounding economic competition with ethnic conflict.

African off—shore oil fields have great appeal. The type of oil found there is mainly the 'sweet crude' which is easily refineable and yields high value products. The offshore nature of the finds insulate the fields from much of the violence which periodically cuts off oil from on—shore fields (particularly in Nigeria, where regional violence and conflict between Islamists and Christians seem endemic). 

Angola has long been an exporter of oil to America. New off—shore fields there could soon be exporting 500,000 more barrels per day. Brazil also has vast offshore deposits just being tapped (since they have kicked the oil habit by expanding their alternative ethanol based fuel production, the vast bulk of this supply will be available for export). Algeria, too, will be producing from large fields, soon.

In America, the headlines in the papers a few weeks ago regarding the strike by a consortium of  oil companies in the Gulf of Mexico (using advanced drilling platforms) pointed out the potential of these fields alone being the size of Alaska's North Slope. This might just be the tip of the iceberg since the Gulf has never been drilled to this depth before and only a tiny section of it was explored. We might have our own oil rich Gulf waiting to rival that of the Persians and Arabians. Note that Florida's restrictions on offshore drilling have kept the potential oil riches there unexplored.

Lynch also thinks that in the short—term we might see further pressure on oil prices, since he suspects a large percentage of the rise in prices has been speculative. Billions in hedge fund money has been speculating in the commodity markets in general, and in energy in particular. These funds have been hoping for a bad hurricane season in the Gulf and associated supply disruptions.

A previously unheard of amount of oil has been stored in oil tankers and fuel tanks around the world in anticipation of this possibility. The hedge funds have also been hoping for heightened geo—political  risk playing a role in helping to escalate oil prices.

Now that President Bush has for the time being taken a softer line toward Iran  (at least in his rhetoric), this 'risk premium' is evaporating. Recently, a major hedge fund speculating in natural gas has admitted losing billions in that market and has been selling its assets to reduce its risk and meet its margin requirements. This process might very well play out with more hedge funds in the future, resulting in further liquidation of long positions and dumping of inventory onto the world oil markets.

Another reason for the decline in oil prices can only be speculated upon.

Arab oil nations have historically been quite secretive regarding the size of their reserves and their exports. In the oil cartel extra profits can come from individual members cheating on export quotas.  Lynch believves the Saudis will be bringing a large new field (the Khursaniya) into production soon, unleashing more supplies onto the market.

This supply can be an oil—weapon in reverse, one directed at Iran by the Saudis. Since the Sunni Wahhabis in Saudi Arabia view Shiite ascendancy as a threat to their world, it behooves the Saudis to attempt to weaken Iran and thus reduce the threat to the Sunni dominance of the Muslim world.

The Saudis fear Iran. Particularly, a nuclear—armed Iran. The world was shocked when the Saudis and Egyptians and various other groups in the Arab world publicly criticized Hezb'allah for attacking Israel. However, this was merely a manifestation of the tension between the Sunni and Shiite worlds within the Middle East.

It is in the Saudi interest to see Iran defanged, and the easiest way to do this would be to pump more oil since the Iranian regime depends on a high price of oil to ensure some level of stability within Iran, as well as to fund the Shiite ascendancy in Lebanon.

Such a strategic geopolitical move by the Saudis would be a reprise of the role they played in ousting the Russians from Afghanistan. Russia needed money from its oil exports to fund its government domestically and to engage in the invasion and occupation of Afghanistan. The Saudis worked with America to pressure the Soviets to leave Afghanistan.

America handled the military side, and the Saudis pumped huge amounts of oil to bring down the price of oil to such an extent that Russia could no longer afford its Afghan adventure.

The Saudis may be pumping more oil than we are aware of right now to help bring down the price.  Perhaps, President Bush  may be reducing the 'risk premium' that has propped up oil prices by taking a softer, more diplomatic line towards Iran. Lower oil prices will pressure the Iranian regime domestically as money flows dry up.

Let us hope history repeats itself in that part of the world. As it so often seems to do, though not ususally to our benefit. This time might be an exception.

Ed Lasky is news editor of American Thinker.

Iran's mullahs have threatened an oil embargo in response to pressures exerted to accept curbs on its nuclear program — curbs that it has agreed to when it signed the Nuclear Non—Proliferation Pact. This agreement, and subsequent promises made to the International Atomic Energy Agency and to the European Union, have been broken repeatedly by Iran.

A clandestine nuclear program was discovered to exist in Iran, outside the purview of international inspectors. Iran has benefited from the nuclear smuggling ring of Pakistan's A.Q. Khan and from access to North Korea nuclear and missile technology. Clearly, Iran has a nuclear weapons program and it has made clear its intentions to unleash a genocide upon Israel.

Now the world is responding, albeit in faltering steps, as the UN Security Council pursues its mincing way toward dealing with the Iranian threat. Nevertheless, even these faltering steps have enraged Iran. 

The Iranians have not only taunted the world with a threat to restrict oil exports should action be taken against them, but have also made oblique references to blocking the export of oil from the Persian Gulf nations by use of military means. The narrow choke points in the Gulf could be attacked by the Iranians, at least temporarily halting the flow of crude.

Yet despite these provocations, the price of oil has been plummeting on world oil markets. Since the price of oil has a 'risk premium' built into it to reflect the geopolitical risk to oil supplies that come from the unstable Persian Gulf region, these increased risks (let alone the threat from another Israel—Hezbollah war) seem to be discounted by oil buyers. Why might this be so?

Two recent articles highlight some intriguing possibilities.

Max Schulz makes the point in National Review Online that Iran's threat to remove oil supplies is not as potent as it once was because of the 700 million barrel (and climbing) Strategic Petroleum Reserve (note, America does not import any Iranian oil but since oil is a fungible commodity traded world—wide, imbalances in oil supply and demand effect all oil importing nations).

This Reserve did not exist during the previous Arab oil embargo in 1973. Moreover, our economy is far less dependent on oil than it once was:  more than 85% of the growth in energy demand in the last 25 years has been met by electricity (only a small percentage of which is generated by burning oil). As our economy has moved towards a service economy we have moved away from a petroleum economy: a trend that will continue apace.

Michael Lynch, President of Strategic Energy & Economic Research, thinks that oil prices will continue to plummet as demand reflects slower world wide economic growth and, importantly, as vast oil supplies come on—line.

While new drilling techniques (horizontal drilling) and advanced recovery techniques have squeezed new life out of faltering fields (both the Alaskan oil fields and the North Sea have far out—produced initial expectations of their recovery potential), the huge new fields coming on—line now and in the future promise to blunt any Iranian oil threat.

Since 2003, industry spending on exploration and production has exploded from $169 billion to $277 billion in 2005 — 64% growth in just two years, with continuing growth since. This increased spending is making a big, and under—appreciated impact.

Just a few weeks ago, oil from a million barrel a day field in Azerbaijan started flowing through a new oil pipeline. Iran is also concerned that the Azerbaijan will aid fellow Azeris in Iran who have become  increasingly rebellious towards their Persian oppressors, incidentally, compounding economic competition with ethnic conflict.

African off—shore oil fields have great appeal. The type of oil found there is mainly the 'sweet crude' which is easily refineable and yields high value products. The offshore nature of the finds insulate the fields from much of the violence which periodically cuts off oil from on—shore fields (particularly in Nigeria, where regional violence and conflict between Islamists and Christians seem endemic). 

Angola has long been an exporter of oil to America. New off—shore fields there could soon be exporting 500,000 more barrels per day. Brazil also has vast offshore deposits just being tapped (since they have kicked the oil habit by expanding their alternative ethanol based fuel production, the vast bulk of this supply will be available for export). Algeria, too, will be producing from large fields, soon.

In America, the headlines in the papers a few weeks ago regarding the strike by a consortium of  oil companies in the Gulf of Mexico (using advanced drilling platforms) pointed out the potential of these fields alone being the size of Alaska's North Slope. This might just be the tip of the iceberg since the Gulf has never been drilled to this depth before and only a tiny section of it was explored. We might have our own oil rich Gulf waiting to rival that of the Persians and Arabians. Note that Florida's restrictions on offshore drilling have kept the potential oil riches there unexplored.

Lynch also thinks that in the short—term we might see further pressure on oil prices, since he suspects a large percentage of the rise in prices has been speculative. Billions in hedge fund money has been speculating in the commodity markets in general, and in energy in particular. These funds have been hoping for a bad hurricane season in the Gulf and associated supply disruptions.

A previously unheard of amount of oil has been stored in oil tankers and fuel tanks around the world in anticipation of this possibility. The hedge funds have also been hoping for heightened geo—political  risk playing a role in helping to escalate oil prices.

Now that President Bush has for the time being taken a softer line toward Iran  (at least in his rhetoric), this 'risk premium' is evaporating. Recently, a major hedge fund speculating in natural gas has admitted losing billions in that market and has been selling its assets to reduce its risk and meet its margin requirements. This process might very well play out with more hedge funds in the future, resulting in further liquidation of long positions and dumping of inventory onto the world oil markets.

Another reason for the decline in oil prices can only be speculated upon.

Arab oil nations have historically been quite secretive regarding the size of their reserves and their exports. In the oil cartel extra profits can come from individual members cheating on export quotas.  Lynch believves the Saudis will be bringing a large new field (the Khursaniya) into production soon, unleashing more supplies onto the market.

This supply can be an oil—weapon in reverse, one directed at Iran by the Saudis. Since the Sunni Wahhabis in Saudi Arabia view Shiite ascendancy as a threat to their world, it behooves the Saudis to attempt to weaken Iran and thus reduce the threat to the Sunni dominance of the Muslim world.

The Saudis fear Iran. Particularly, a nuclear—armed Iran. The world was shocked when the Saudis and Egyptians and various other groups in the Arab world publicly criticized Hezb'allah for attacking Israel. However, this was merely a manifestation of the tension between the Sunni and Shiite worlds within the Middle East.

It is in the Saudi interest to see Iran defanged, and the easiest way to do this would be to pump more oil since the Iranian regime depends on a high price of oil to ensure some level of stability within Iran, as well as to fund the Shiite ascendancy in Lebanon.

Such a strategic geopolitical move by the Saudis would be a reprise of the role they played in ousting the Russians from Afghanistan. Russia needed money from its oil exports to fund its government domestically and to engage in the invasion and occupation of Afghanistan. The Saudis worked with America to pressure the Soviets to leave Afghanistan.

America handled the military side, and the Saudis pumped huge amounts of oil to bring down the price of oil to such an extent that Russia could no longer afford its Afghan adventure.

The Saudis may be pumping more oil than we are aware of right now to help bring down the price.  Perhaps, President Bush  may be reducing the 'risk premium' that has propped up oil prices by taking a softer, more diplomatic line towards Iran. Lower oil prices will pressure the Iranian regime domestically as money flows dry up.

Let us hope history repeats itself in that part of the world. As it so often seems to do, though not ususally to our benefit. This time might be an exception.

Ed Lasky is news editor of American Thinker.