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The Coming Oil Conflict In Iran

By Reggie Abaca, Published: January 19th, 2010 12:12 PM CST

Newsmakers and even the oil markets (USO, X, USL) have learned to get used to tensions between the West and Iran.  Last week, an Iranian physics professor linked to the country’s nuclear program was assassinated.  Iran blamed Israel and the United States for the remote control bombing of the man’s car.  Iran, for once, was probably right.

Foreign spies in Iran are likely trying to help make it clear to the Iranian government that Israel and the United States will not tolerate Iran’s nuclear program.  The bombing forces many scientists in Iran think twice about their profession.

Next door, in neighboring Iraq, the country is accepting 100 billion in foreign investment that will update Iraq’s aging oil production capabilities, possibly allowing them to produce much more oil and become a more important player for the oil market.  Some peak oil analysts now even see a risk in the idea that oil production has hit its peak due to the new investments.  Others contend that cheap oil production has still hit its peak but more expensive production will continue to help meet demand.

Either way, Iran is left with aging oil producing technology and a desperate radical religious government which has demonstrated a disregard for its citizens in recent anti government flare ups.  Their government does not hesitate to turn the country’s attention on their battle with Israel and the United States to garner nationalist sympathy and turn their citizens’ attention away from internal struggles.

But the recent killing of the professor suggests that the empty threats are becoming decreasingly empty and increasingly real.  In slow motion, we may be witnessing the path to war, where an unreasonable government is left with no other choice but to create international conflict.  The unpopular Iranian government has proven that it can survive its own country’s protestors and will intentionally try to refocus the country’s rage on its nation’s enemies.  The U.S. and Israel, in turn, are adamant about stopping the Iranian government’s nuclear program and the recent assassination proves how far they are willing to go.  Iran has made clear that their greatest weapon is the disruption of the oil trade.  That’s a trade-off that Israeli Prime Minister Benjamin Netanyahu has repeatedly accepted as fine with him.

What may happen?  Rising tensions followed by a good excuse for the West to attack is what happens next, if the history of Iraq were to repeat itself in Iran.  The mullahs will then have no choice but to disrupt traffic in the Straight of Hormuz, which will temporarily devastate the oil trade.  After the U.S. takes back control of the passageway, Iranians will put their resources into attacking oil pipelines and oil wells, as Iraq did to Kuwait in a similar act of desperation.

If history were to repeat itself, oil prices are in for another decade of dramatic price increases.

Related: OIL, USO, USL

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