Oil Rules

The BBC has outlined the policy conflicts that are going on in several capitals regarding the prospect of war over the Iranian nuclear program. I am going to go out one a limb and state that cooler heads than Bush, Ahmadinejad, and the Israeli cabinet will prevail and no such attack will take place.

The reason is oil at $145/barrel. This is a precarious price and perhaps it won't stay this high, but it means that Iran's exports of oil, worth perhaps $150 million per day a year ago, are now worth $350 million. Their natural gas reserves are also much more valuable.

If they don't rock the boat too much, the average Iranian is going to get $1100/year more, which is about $3000 after considering local purchasing power. That's per capita, so figure $12,000 for the typical family. Enough to put them into the middle class by world standards. It's a lot to ask them to sacrifice this for a dispute in Palestine.

The Israelis must also understand that an attack on Iran would push oil towards $200, assuming moderately hostile response from Iran, which would in turn bring the U.S. economy to a halt. No other major power is blindly supportive of Israeli objectives, and they would risk losing their one reliable ally.

On the flip side, there's a rather Machiavellian option that the Iranians might be playing. Their nuclear program may not be doing as well as they, the Israelis, and the Bush Administration want everyone to believe. It's certainly not necessary to their wellbeing. They are being offered some incentives to dismantle it, but it might be vastly more profitable to them to have Israel bomb it. Another year of prices from $150 to $200/barrel, which they should be able to sustain with saber rattling, would bring them another $50 billion or so with no strings attached. They would push the United States into a deep recession and increase the diplomatic isolation of Israel.

I don't think Ahmadinejad is smart enough to figure this out, but he's motivated by some screwy religious concepts and there may be deeper thinkers over there who do see the possibility. Hard to know.

Meanwhile, I don't think this problem exists in Iraq. There's now just too much money available. They will settle their differences, although maybe not clearly enough that the U.S. can stop bankrupting itself with the occupation.