Iran, Oil Prices and The Bomb

The basic premise of this blog is and has always been that money is always the bottom line. It is as true today as it was when I started it all those years ago.

Today (15 Jul 08), the price of a barrel of oil fell below $140. The last time this happened, the Iranians started shooting off missiles and frightening the women and children. Almost immediately, the price shot back over $140 a barrel. I’ll come back to this shortly.

Iran wants into the Country Club of being a nuclear power. They said so loudly and publicly. They announce to the world that they are only interested in pursuing nuclear power for peaceful ends – they need more electricity like everybody else. They also declare that it isn’t anyone else’s business that they have a nuclear power plant or three. And they’ll do whatever it takes to get into The Club.

But joining The Club requires more than simple desire. It requires brainpower and vast sums of cash. Brainpower is needed since nobody in The Club will sell you the goods turnkey. You must build your own. Entrance to the front door of The Club is earned, not purchased. And cash is needed because the aspiring member has to build a significant infrastructure to support the enterprise. Trial and error cost plenty.

The Iranians need dough, massive amounts of dough. Iran currently suffers under the weight of economic sanctions levied by the world because they are “State Sponsors of Terrorism”, whatever that means. Currently, Iran’s unemployment rate hovers around 10%. Their inflation rate is around 26%. Both numbers are not good. To combat that – and make sure the government stay in power – they need gigantic infusions of foreign cash. And they have only one way to get it: oil. And yes, they have lots of oil. With prices at $140 + per barrel, they have just enough dough to prop up their otherwise sagging economy and built nuclear infrastructure.

To that end, the Iranian government has leased as many as 15 VLCCs – very large crude carriers – supertankers if you will – to store their oil. They don’t have a strategic petroleum reserve (because those cost money to build). By pumping almost 5 months worth of supply unto these tankers, they can effectively constrain the world’s supply of crude, without having to stop pumping. To stop pumping would signal the world that something is up. So, they lease the VLCCs instead and make up some cockamamie story as to why they need to do that.

Viola! The price of oil doubles since Jan 07. The Democratically controlled Congress is guaranteed to not do anything to increase supply – no drilling in ANWR or off shore – so there is no possibility of popping the bubble. So Oil goes up and up. The Iranians are happy, or as happy as they ever get.

But not today. The price of oil is down because demand is dropping, As goes demand, so goes the price. So you can bet that the Iranian government will do something crazy this week to get the price of oil up where it supports its teetering economy and builds that ticket into The Club. But there’s a problem, the last crazy stunt they pulled was just that: a stunt. The high flying technology they demonstrated had nothing to do with missiles and everything to do with Photoshop™.

I’m starting to think of Iran as less of a 7^th Century Theocracy and more like a modern day Persian Empire wannabe. In order to gain respect, they have to be members of The Club. After all, aren’t those pesky Jews members of The Club? How can the supposedly superior Persian Culture be second best in the neighborhood to those Zionist Crusaders?

Note to Mahmoud: the servant’s entrance to The Club in around back and the lawn mower is in the shed. The front door isn’t for bullies or thugs or wannabes. The price of your oil is about to crater because we’ve figured out your game.