Iran showdown -- Prepare for high oil prices

August 23, 2006

The month-long conflict between Israel and Hizbullah is winding down, only to lead into the greater conflict between the U.S. and Iran. Many experts have stated that Israel and Hizbullah were proxies for the greater conflict, and that Hizbullah has won.

During the conflict, the U.S. passively accepted Israel’s attempt to eradicate Hizbullah despite the death and displacement of thousands of innocent Lebanese civilians. As a result, the U.S. has lost support with its European allies, Hizbullah has gained popularity with the Arab world for successful resistance to the "Western meddlers", and the Israeli government has lost support among its citizens for sending poorly trained reservists into a lengthy and expensive war.

Now, the U.S. is asking the Security Council to impose sanctions on Iran if it doesn’t agree to suspend uranium enrichment. Although the deadline is August 31, Iran has already stated it plans to ignore the Security Council’s Resolution 1696. However, sanctions would require Security Council members China, France and the UK to interrupt their oil imports from Iran. On the other hand, the U.S. imports no oil from Iran and so has nothing to lose from sanctions. Some experts state that Iran knows this, and is using their resistance to the Resolution to split the UN Security Council.

What It Means:
The next few weeks will be very telling in terms of the global balance of power. Will the U.S. allies make the sacrifice that sanctions would require? If not, then Iran has won.

On the other hand, other Muslim nations, who are primarily Sunni, are growing increasingly concerned about the rise in power of the Shiite faction: Iran, Hizbullah, Palestine, Syria and the current majority in Iraq. So far, the governments of Saudi Arabia, Qatar and Egypt have been reluctant to condemn their Shiite neighbors too loudly since their own constituents view Hizbullah and Iran as Muslim heroes. Iran also knows this, and is using the showdown as a way to gain more regional power. Furthermore, President Ahmandinejad is in a power struggle with the Iranian ayatollahs, and is using the situation to gain support for more seats in the Iranian legislative elections this fall.

A final complication is the possibility that the U.S. encouraged Israel to test an air strike against Hizbullah as a prelude to U.S.-led air strikes against Iran. Should this occur, oil prices will skyrocket, and the U.S. current account deficit will rise to new levels, putting further downward pressure on the dollar. This would lead to increased inflation from high import prices, due to higher oil prices, and a weaker dollar.

Action Steps:
Prepare for the possibility of increased inflation and higher oil prices. Now may be a good time to increase the amount of commodities in your asset allocation. Ask your financial planner to recommend a good commodities mutual fund. If inflation increases, the Fed will resume rate increases. Make sure you are out of any long-term bond funds, and switch into money market accounts.

Source: Source: China People’s English Daily Online, August 17, 2006; Radio Free Europe, August 17, 2006