Revenge of the Atomic Ayatollahs

Diane Francis column Friday May 12:

There's a new oil "cartel" more powerful than OPEC and led by the Atomic Ayatollahs of Iran.

The other "cartel" members are Russia and Venezuela - a troika responsible for scaring everyone, thus creating an "anxiety" premium for oil and gold prices.

In the past year, gold and oil have both leaped by more than 50% in price or nearly US$700 per ounce of gold and US$70 a barrel for oil.

And there's little doubt, given the leadership in these three countries, combined with the geopolitics involved, that these three, by luck or guile, will help hike the price of oil to at least US$100 a barrel in pretty short order.

(Caveat is that they aren't really disciplined and run the risk of breaking the cardinal rule of cartels: don't be too greedy. If price hikes are too much too soon, they can bring about substitution (such as mandated hybrid cars) or recessions, either of which would result in price declines.)

But in the medium term, going long on oil and gold seem unassailable strategies, just based on the situation at hand.
By far, the biggest contributor to the "anxiety premium" is the controversy concerning Iran's nuclear program and its failure to fully cooperate with nuclear inspection authorities.

Messages are somewhat mixed, and often frightening, and Iran's true motives are unknown. Perhaps the country merely wants to exploit nuclear power so it can export more oil to others for cash. Perhaps the country wants to join the neighborhood's nuclear club (India, Pakistan, Israel) for its own protection. Perhaps its Persian leaders are frightened of the 300 million volatile Arabs who have attacked in the past and surround them.

Perhaps the Ayatollahs are playing the oil futures markets. Perhaps the Iranians intend to create weapons of mass destruction and hold the world hostage through its network of terrorists. Or perhaps all of the above.

What is known is that every time Iran's slightly unhinged, designated spokesman, President Mahmoud Ahmadinejad, opens his mouth the prices of oil and gold jump. And so does the value of Iran's treasury.

The country is the world's fourth largest producer, exporting nearly four million barrels a day. At current prices, that's US$102 billion a year. This is so significant that any possibility that its production would be curtailed sends prices upward.
Iran's production could be reduced by any number of events from United Nations sanctions to military intervention. It could also be cut back on purpose by Iran in protest or to make prices rise higher.

For these reasons, the Iranian issue will continue to add to global anxieties for some time to come.

Another worry is that the American president has been sabre rattling, worrisome given his track record of launching a trillion-dollar war in Iraq without proper due diligence.

The American position concerning Iran is counter-productive. Asking the UN Security Council to threaten sanctions then military intervention is impossible because the Russians will veto any such strategy as will China which signed a US$100-billion deal to buy 125,000 barrels of oil a day from Iran for ten years.

Worse, forcing the matter onto the UN debating society will actually insure that the issue remains above the fold in the world's newspapers, thus contributing even greater anxiety for markets.

Another question is why the urgency?

Most experts agree that the Iranians are years away from such bomb technology, if in fact that's their goal. And while nobody wants every tinpot dictatorship and theocracy to have a bomb, Iran is hardly the biggest culprit.

North Korea has a bomb already, and an even crazier leader and yet a solution there has been left to the neighbors to fix.
It's also interesting to note that Iran is getting hassled even though American allies such as India, Pakistan and Israel already have bombs and have refused to sign the non-proliferation treaty. Iran is a signator.

While India and Israel are benign democracies, Pakistan is not. It's currently run by a military dictator who a friend on the wrist who was exposed for exporting nuclear bomb technology to North Korea, Iran and others around the world.

While Iran remains the focus of most oil anxiety, there are two others playing the game: Russian President Vladimir Putin (wouldn't you love to see his investment portfolio) and Venezuela's populist President Hugo Chavez.

Russia has been scaring everybody by pushing around oil companies inside the country and pushing around neighbors and Western Europe over gas supplies.

Russia is hooked on high oil prices as the world's second largest exporter, some eight million barrels daily, and has been able to mask poor governance with surging oil cash flows.

Tnen there is Venezuela where anti-Americanism reigns, political turmoil continues and whose leader has frightened markets with nationalization plans that are guaranteed to reduce production in the long run.