Iran: Using Oil as a Weapon, But Only Rhetorically
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Dear Friends:

The hottest media topic of the New Year is the Israeli-Palestinian conflict in Gaza. And as I was reading the New York Times on Tuesday, I came across this sentence in one of the articles that was staggeringly truthful and more than a little unsettling in its implications for me as an investor.

"There are other ways to construe the context of this conflict of course. But no matter what, Israel's diplomats know that if journalists are given a choice between covering death and covering context, death wins."

Now, I'm NOT trying to get into a debate about the rights and wrongs of either side, but if you're an investor, and you're trying to make decisions about where this conflict might drive oil prices, for example, then context is everything. And according to the New York Times, if you're relying on journalists for context, forget it.

But you do have an alternative: my friend George Friedman's company, Stratfor, is the unbiased source for insightful analysis of global events. George and his team are all about context – and they provide it without bias or an agenda. If you're my age, you remember "Just the facts, ma'am." Whether it's the conflict in Gaza, the war between Georgia and Russia, or the mayhem and violence in Nigeria, when I need to know how geopolitics is going to hit energy prices, I turn to Stratfor.

I'm including today one of their analyses on the conflict: Iran: Using Oil as a Weapon, But Only Rhetorically. In it, Stratfor showcases its strengths: unbiased analysis--and in this case, of a situation mainstream media has barely even registered. George has kindly arranged a special offer for my readers. Click here, and you'll get 2 years of Membership for the price of 1 for just $349. Plus George is including a free copy of his new book coming out later this month (I'll be reviewing it for you in a couple weeks.)

Your all-about-context analyst,
John Mauldin


Iran: Using Oil as a Weapon, But Only Rhetorically

An Iranian Oil Refinery

Summary

Iran is calling for oil-producing states to launch an embargo against the West in protest of Israel's current military operations in Gaza. But while Tehran would love to see oil prices rise, it is in no position to cut production -- and neither, really, are its Arab neighbors. In reality, the embargo threats are mere atmospherics in the ongoing geopolitical rivalry between Iran and Saudi Arabia.

Analysis

Brig. Gen. Mirfeysal Bagherzadeh, a commander of Iran's elite Islamic Revolutionary Guards Corps (IRGC), on Jan. 4 called on Muslim countries to use oil as a weapon to end the ongoing Israeli offensive in Gaza, now in its 10th day. Bagherzadeh said Western dependence on the energy resources of the Islamic world should be used to put pressure on Israel's backers in Europe and the United States. His remarks come on the heels of similar calls from lawmakers in Bahrain, a country whose political landscape is dominated by its Shiite majority, which in turn has ties to Iran.

For a variety of reasons, however, such calls will not spark any serious attempts to use oil as a means to affect the Israeli-Palestinian conflict. Indeed, Iran's real purpose is not to spearhead an oil embargo against the West, but rather to score political points by emphasizing publicly that Tehran is the only player in the region trying to support the Palestinians during an Israeli military offensive. The primary goal is to make its Arab rivals look bad -- especially Saudi Arabia and its allies in the Gulf Cooperation Council. (Though if the markets were spooked by the threat and oil prices jumped, the Iranians would not mind at all.)

Tehran actually is no position to come to the aid of the Palestinians; only Saudi Arabia and the other, smaller Persian Gulf states would be able to make such an embargo work. These countries are more concerned about their bottom lines, however. At a time when the world is in the middle of a major financial crisis and the price of oil has fallen by some 70 percent from the record highs of July 2008, they need to sell oil just as much as the West needs to buy it. That is why Saudi Arabia, the main mover and shaker in the Organization of the Petroleum Exporting Countries (OPEC), is already having a hard time getting the other cartel members to abide by recently announced production cuts aimed at raising the price of oil to more acceptable levels.

The petroleum-rich Arab states still have massive reserves to keep them financially healthy for quite some time to come. In contrast, the Iranians are hurting badly from the slump in oil prices and desperately need more income. Thus, in reality, Tehran has much more to lose by cutting production than its Arab rivals do. And because of sanctions, Iran does not even sell oil to the United States -- so there is nothing Tehran can do to "implement an embargo" against the world's No. 1 oil consumer.

But Iran is hoping its threat will kill two birds with one stone, pushing prices up even if there is no embargo. Despite their long slide, oil prices have jumped some 25 percent in the 10 days since the Israeli operation began. It is not clear that this increase is actually related to the Gaza operation -- after all, Israel produces a mere 5,966 barrels per day (bpd) of oil, consumes only about 250,000 bpd and transits nothing worth mentioning. But Tehran is hoping that the markets are spooked, and that they will be spooked further by the threat of an embargo.

For oil prices to be affected significantly, however, the oil-rich Arab states would need to join Iran in making an issue of the Israeli operation -- which they are not doing. On the contrary, they are hoping that the assault will cut Hamas down to more manageable proportions and thwart Iran's attempts to use the Israeli-Palestinian conflict to its own advantage.


Disclaimer

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Posted 01-08-2009 9:33 AM by John Mauldin