Iran brinkmanship - will oil skyrocket?

April 29, 2006

Iran has until next week to stop enriching uranium. They said that, not only won’t they agree, but that they will stop working with the IAEA and bow out of the Nuclear Non-Proliferation Treaty if sanctions are applied. Furthermore, they threatened to export their nuclear development knowledge to other countries.

The U.S. is drumming up support for sanctions, and possible military intervention. Russia has offered to set up a joint uranium enrichment firm to give Iran an out, but no details are available. It looks like a showdown is inevitable. The undersecretaries of the G-5 and Germany will meet May 2 to discuss next steps.

What It Means:

Iran is intent on producing nuclear power, and according to the Nuclear Non-Proliferation Treaty, they have that right. Whether it is for peaceful purposes (they say) or weapons (U.S. says) no one really knows. Most other countries support their right to produce nuclear fuel, and are willing to wait and see if it leads further. The U.S., on the other hand, is taking the threat of nuclear armament very seriously. End result...higher oil and gas prices, at least until this thing is resolved one way or the other.

A summary other key issues:

• China and Russia aren’t willing to support sanctions. Without unanimity on the UN Security Council, sanctions will not be enforced unilaterally, and most likely Iran will continue enriching uranium.
• No other country supports U.S. military intervention.
• In the back of their minds, the U.S. is thinking military intervention would lead to the overthrow of an unpopular leader. However, he was democratically elected, and overthrow is unlikely.
• Any disruption would increase already high oil prices...nobody wants that, and Iran knows it.
• One of Iran’s goals is to continue disruption in Iraq. They support the Shiites, and some even feel they would like to encourage civil war, and possibly consolidate their sway with the Iraqi Shiites.

Action Steps:
Make sure your portfolio has natural resources funds. Protect yourself from gas price spikes by downsizing your next vehicle. Gas and oil price will decline after this crisis, but probably not ever to 2004 levels.

Source: U.S. State Department, United Nations