Junto Boys

OPEC PRODUCTION CUT

With the election on our minds I neglected to post anything on the production cut by OPEC. Just like the housing market crashed so it was inevitable that the oil market would follow suit. Not good news if you're funding terrorism with the money, thinks Iran.

Anyway, I came across the most thoughtful piece explaining the politics behind the production cut. What we learn is that the Saudis aren't playing along with the Persians.

The Saudis have been concerned for several years now about Iran's growing strategic influence and designs for regional hegemony in the Gulf and in a number of Arab countries, primarily Iraq, Syria and Lebanon.

The sharp decline in oil prices has provided the Saudis with an opportunity to inflict pain on Iran and constrain its political ambitions for regional hegemony by keeping oil production high and oil prices down. In practical terms, the Saudi's subtle weapon against Iran is at least as potent as the U.N. and U.S. sanctions combined. An economically weaker Iran translates into an Iran that is weaker both politically and strategically, and hence less of a threat to the Gulf region.

There is one other reason which has recently emerged as a source of conflict between Shi'ite Iran and a number of Sunni countries in the Middle East, particularly Saudi Arabia but also Egypt, Jordan and the Arab Gulf countries. These countries have been concerned about Iranian efforts to engage in large-scale proselytizing of Sunnis into Shi'ism, which is perceived by the majority of the Sunnis, particularly the Wahhabis in Saudi Arabia, as a false religion whose practitioners are apostates.


A recent study by the International Monetary Fund (IMF) has suggested that in order for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. The equivalent figure for Saudi Arabia is $50 per barrel and for the United Arab Emirates and Qatar even lower.

The price of oil is determined by the twin factors of economics and psychology. Economic factors are shaped by supply and demand and when demand plummets the prices quickly follow suit. But oil prices are also sensitive to psychological factors, such as perceived threats to the sources or routes of oil supply. In the latter case, Iran may seek to generate a crisis that would bring oil speculators back in droves and cause oil prices to spike. In this regard, Iran could put into action one of the following options in an attempt to both divert national discontent outward and make an economic gain at the same time:

First, Iran could escalate the conflict in Iraq to a degree that would deny the market a supply of 1.5-2.0 million b/d of much needed Basra light crude.

Second, Iran's Revolutionary Guards could sabotage an oil tanker in the Gulf of Hormuz on some flimsy argument that the tanker has violated Iran's territorial waters. Such act would raise the political tensions to high levels and greatly increase insurance premium to suffocating levels or discourage oil tankers from transporting Gulf oil.

Third, Iran could instigate a conflict between Hizbullah and Israel that could plunge the Middle East into a new round of a military conflict that might also involve Syria (Iran's strategic ally in the area). Armed conflicts in the Middle East quickly translate into higher oil prices, with or without global recession.

It looks like Obama may have his hands full soon.