Oil Hits $130
By Anatole Kaletsky
The Times, May 22, 2008
Edited by Andy Ross
The escalation of oil prices, which this week reached $130 a
barrel, threatens to do far more damage to the world economy than the credit
crunch. The oil and commodity boom threatens the lethal combination of high
inflation and economic stagnation last seen in the 1970s and early 1980s.
Commodity inflation is far more lethal than a credit crunch for two reasons. It
prevents central banks in advanced economies from cutting interest rates to keep
their economies growing. And it encourages the governments of developing
countries to turn their backs on global markets. For both these reasons, the
boom in oil and commodity prices could reverse the globalization process.
The good news is that the present commodity and oil boom shows all the classic
symptoms of a financial bubble. This commodity boom is not just driven by
China's insatiable appetite for food and energy, geopolitical conflicts in the
Middle East, the peaking of global oil reserves, droughts caused by global
warming and so on.
To see that these fundamentals are all irrelevant, we have merely to see that
none of them has changed in the past nine months. Many commodity prices are no
longer rising. Rice, wheat and pork are 20 to 30 per cent cheaper than they were
two months ago. And the price of industrial commodities such as lead, zinc and
nickel has now dropped by 40 to 60 per cent. Most major commodity indexes would
already be in a downtrend were it not for the dominance of oil.
In the late stages of financial bubbles, it is quite normal for prices to become
completely detached from economic fundamentals. House prices in Florida and
Spain kept rising even after property developers built far more homes than they
could possibly sell. The same thing happened in credit markets. Similar examples
can be cited from the bubbles in internet stocks and Japan.
Consider the situation today in oil markets. The Gulf is crammed with
supertankers chartered by oil-producing governments to hold the inventories of
oil they are pumping but cannot sell. There are few buyers for physical oil
cargoes at today's prices, but there are plenty of buyers for pieces of paper
linked to the price of oil next month and next year. This situation is exactly
analogous to the bubble in credit markets a year ago.
The standard economic assumption that supply and demand drive prices is only a
starting point for understanding financial markets. In boom-bust cycles, the
textbook theory is wrong. A self-fulfilling momentum of rising prices and an
inbuilt bias in the way that investors interpret the world drive market prices
to a position that bears almost no relation to supply and demand.
Oil and Gas in Iran
By Roger Howard
The Guardian, May 22, 2008
Edited by Andy Ross
A hundred years ago, commercial oil was first discovered in the
Middle East. On May 26, 1908, in a remote Persian wilderness, a British-led
drilling team stood back in awe as the ground rumbled and a black fountain
spurted high into the air. By 1916, Persia was meeting more than a fifth of the
Royal Navy's demand for oil.
A century on, Iran's natural resources could help in western Europe's quest for
energy security. Russia is the source of about 40 percent of the EU's natural gas
imports. The Russian-Ukrainian dispute in 2006 reminded EU governments of the
need to find different suppliers.
The EU could finance the construction of the proposed Nabucco pipeline, to carry
gas from Azerbaijan and Turkmenistan under the Caspian Sea, across Turkey and
into southern Europe. But the Russians have worked hard to thwart these plans.
Iran could make Nabucco commercially viable. Iran's deposits
of natural gas are reckoned to be second only to Russia's, and could be fed into
western Europe through an extension of the existing Tabriz-Ankara pipeline.
Pressure from Washington makes this unlikely. Iran cannot export gas without
massive foreign investment, but only last week Shell and Repsol bowed to pressure
and shelved plans to develop Iran's vast South Pars gas field. Iran is OPEC's
second largest oil exporter, but it could export much more if it had the foreign
investment that U.S. sanctions have blocked.
Much will depend on the outcome of two forthcoming electoral contests. An Obama
presidency could bring new opportunities for a "grand bargain" between Iran and
the U.S. And a victory for a pragmatic conservative in next year's Iranian
presidential elections would improve the chances of a deal.
Bomb Iran?
Edited by Andy Ross
The White House on Tuesday flatly denied an Army Radio report
that claimed U.S. President George W. Bush intends to attack Iran before the end
of his term. It said that while the military option had not been taken off the
table, the administration preferred to resolve concerns about Iran's push for a
nuclear weapon "through peaceful diplomatic means."
Army Radio had quoted a top official in Jerusalem claiming that a senior member
in the entourage of President Bush, who visited Israel last week, had said in a
closed meeting here that Bush and Vice President Dick Cheney were of the opinion
that military action against Iran was called for.
The Army Radio report stated that according to assessments in Israel, the recent
turmoil in Lebanon, where Hezbollah has established de facto control of the
country, was advancing an American attack. Bush reportedly considered
Hezbollah's show of strength evidence of Iranian President Mahmoud Ahmadinejad's
growing influence.
In an interview last week in the Oval Office, Bush said: "Iran is an incredibly
negative influence" and "the biggest long-term threat to peace in the Middle
East ... Iran is involved in funding Hamas and Hizbullah."
In his address to the Knesset, Bush said: "America stands with you in firmly
opposing Iran's nuclear weapons ambitions. ... For the sake of peace, the world
must not allow Iran to have a nuclear weapon."
The Last Resort
By Yossi Melman
Haaretz, May 22, 2008
Edited by Andy Ross
The risks of a military attack on Iran are considered in a new
paper by Patrick Clawson and Michael Eisenstadt of the Washington Institute for
Near East Policy. The main point, notes Dr. Clawson in an interview with
Haaretz, is that the success or failure of a military attack depends on many
variables.
What are these variables?
The type of weapons chosen for the attack: nuclear or conventional weapons? Who
attacks: the U.S. or Israel? Will the attack cause serious collateral damage and
a lot of civilian casualties? Will only the nuclear sites be attacked, or other
regime targets? After the attack, will Iran defect from the Nuclear
Nonproliferation Treaty? If the attack completely destroys Iran's nuclear
program that is one thing, but if it does not, Iran will be able to continue.
What would be deemed a success?
If the attack does destroy the nuclear facilities, and it leads to a broad
consensus in Iran that nuclear weapons are dangerous for the future of the
regime or the nation. In other words, success or failure is determined by the
political result of the military attack. The primary objective of the military
option has to be to convince Iran to cease its nuclear program.
What will be a possible result of an Israeli attack?
That depends. Israel has to create the circumstances in which world public
opinion will understand Israel and its motives, even if it regrets the attack.
Like what happened with the attack against the nuclear
facility in Syria?
Yes. Israel benefited from President Assad's hostile attitude. Israel did not
have to do much because Assad did the job for it. In this respect, Israel also
benefits from Ahmadinejad and his statements.
Do you agree that Iran's reaction if attacked will be
harsh and painful?
No. Iran's record is mixed. When the Taliban assumed power in Afghanistan and
persecuted the Shi'ite minority there, Iran mobilized military forces but in the
end it did nothing. When the U.S. shot down an Iranian passenger airline in
1988, not only did Iran not respond, but the incident hastened its decision to
agree to a cease-fire in the war with Iraq for fear that the U.S. was about to
join the war on Saddam Hussein's side. Iran has lately been threatening that if
it is attacked it will close the Straits of Hormuz and block the flow of oil,
but this would also anger Iran's friends and supporters, such as China and
India.
In the event of an Israeli attack, will the Iranians
launch Shihab missiles at Israel?
Possibly. But the Shihab missiles are not considered particularly reliable, and
their guidance system is not very accurate. Israel's Arrow missiles would
certainly intercept quite a few Shihab missiles. And Iran's firing missiles at
Israel would enable Israel to respond in a decisive manner.
Will Hezbollah mobilize to help Iran and respond
against Israel?
There is no guarantee that Hezbollah will react automatically. Hezbollah are
very aware of Israel's strength, and of the harsh reaction that may result if
Hezbollah attacks.
Is Iran is like a dog whose bark is
worse than his bite?
My assessment is that Iran's options for responding are limited and weak.
AR Senator John McCain
recently sang "Bomb Bomb Bomb, Bomb Bomb Iran"
to the tune of Barbara Ann by the Beach Boys.
