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Intelligence Note No. 2 - Is There An Oil Crisis Coming?
posted Mar 16, 2005 at 07:28PM

Is the market ready to experience an oil shock of historic proportions? Certainly the ground work is being laid.

The bearish technical case lies in overbought readings as oil exceeds prior highs resistance along with some minor divergences in energy equities.. The bullish technical case can be seen by reading the Aden Sister's "Snapshot on Oil".

For a glimpse of the fundamental picture I quote from Phyl Flynn's latest energy report,

"We're at total equilibrium right now between what the world produces and what the world consumes. If the IEA is underestimating demand again - we recall they're not very accurate when it comes to making estimates and get it wrong almost always - the only choice the world will have to meet their actual demand is to go to their inventories. So now the question goes to how much spare production capacity is there in the world that can be ramped up to meet the potential of stronger than expected demand. This doesn't even address a possible disruption in supply due to terrorist activity or weather disasters or any of the myriad of things that could go wrong. "

Mr. Flynn, however, does not mention the very real threat to supply which will come from renewed military action on Iran from either the US or Israel.

Do not let the recent talk of US-European diplomatic efforts fool you. In Israel we are dealing with people who want to assassinate Sharon for being a dove. Even in the best of times, they cannot tolerate uncertainty and have a paranoid view of any potential threat around them. Of course Iran with the bomb is a real threat. You know that Israel would be near the top of the target list. As such, mere proclamations about safeguards from Iran will simply not be enough. They have to be sure, and the only way to be sure is to use military force to destroy Iran's nuclear program.

Indeed Sharon has already given approval in principle to such an operation. See
Revealed: Israel plans strike on Iranian nuclear plant

The question you have to ask, is what would you do if you were in Iran's shoes and just got bombed and a couple of billion dollars worth of energy producing infrastructure has just been vapourized?

It always astounds the neo-conservative brain-trust when people don't immediately roll over and surrender. It certainly won't happen in this case.

As well, the neo-conservative fantasy about moderate reformers rising up to take over the country is just that ...fantasy. It is an occurrence that would have to happen to produce the outcome predicted by their ideology- so ergo that is what they say will happen when they start spinning it to the public.

In reality, expect the reverse to happen, with nationalistic, anti-American fervor sweeping the nation of Iran.

There are plenty of examples. The Serbs were ready to hang Milosevic. When NATO started bombing they were holding rock concerts in his support. Closer to home look at Giuliani. New Yorkers were ready to ride him out on a rail. After 9-11 he was a national hero.

That is the thing about aerial bombardment. You do kill people, lots of them...but the survivors get really pissed off.

Iran does not have the military capacity to start trading direct blows with the US or Israel (one and the same as far as Iranian fundamentalists are concerned). But you can rest assured that the insurgency in Iraq will take on a whole new dimension. I see no difficulty seeing tens of thousands, if not even hundreds of thousands of Iranian fighters infiltrating into Iran. - a prospect that would put the US forces under extreme strain.

You can bet that the Iraqi pipelines will be getting lots of attention.

Of course there is the Iranian oil supply itself. They know the current situation as well as anyone. A straight turning off of the taps would send the US economy into a tailspin. Boycotting the US, and only selling their oil to China is another possible option. Europe will get hit as well, as Iran has no way of ensuring that any oil sold to Europe would not get transferred on to the US.

Terrorist attacks within the US? It would certainly occur to them. After all the US is only two or three pipe-bombs away from becoming a full-fledged police state.

Now all of this is just on the assumption that military force will be restricted to air strikes. What about a new land campaign? Such an adventure would surely border on the fantastical. Yet it is not totally out of the question.

Amongst the men who really run the USA there is certainly no lack of support for such a move. One notices that most of the troops in Iran are drawn from National Guard forces. This means that their front-line armored divisions are available. The announcement that forces are being moved to border areas to stop Syrian infiltration would make a suitable cover, in neo-conservative minds, for such a deployment. Mind you, most of these units remain in the States, and as of yet, have made no signs of getting ready to go back to the Middle East.

Timing? When would this happen? With oil at record highs this is hardly an auspicious time to initiate such action. It could be that they will wait/hope for a pull-back in the oil price just to give them some padding.

In the end it doesn't really matter. Such actions would be economically devastating to the USA, if not the world. Their financial status, already grim, would become unsustainable.

Bankruptcy as the saying goes, occurs slowly, and then suddenly.

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