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Recently some of the fears that investors had
focused on in the 11th hour debt negotiations in Greece have drifted
southeastward towards the Strait of Hormuz. An increasingly bellicose Iran
threatens to throw the world economy into confusion with the potential
closure of one of the world's most important sources of energy.
Catastrophic failure in Athens or the Gulf could plunge the world into
severe recession if not depression. Having discussed the Eurozone at
length, we focus this week on the threats posed by Iran.
Some twenty percent of the world's oil supplies
pass through the Strait of Hormuz, which lies between the Hormozgan province of Iran and Northern Oman. Some
230 miles of heavily fortified Iranian coastline, which includes the
Iranian naval base of Bandar-e 'Abbas, dominates the Strait. Although
U.S. and allied naval ships are deployed in force around the area, a mass
attack of small missile equipped marine craft would present a serious
threat. Even the deployment of Russian made, remotely detonated sea mines
could close the Strait for weeks if not months. In such a situation the
price of oil could skyrocket, acting as an additional tax on a sputtering
world economy.
As Iran struggles with increasingly painful
international sanctions stemming from the nearly universal opposition to
its nuclear ambitions, and as it courts the possibility of an Israeli
strike against those facilities suspected of developing nuclear weapons,
it is desperately searching for a counterweight to keep its enemies at
bay. It likely sees its control of the Strait as a means of economic
blackmail. Unfortunately for the Iranians, even if it could resist the
naval power of the United States and its allies, such a blockade would
inflict even greater proportional harm on its own economy.
However, it is important to note that if a
confrontation were to unfold, the possibility for an Israeli strike
increases significantly. Such an attack, which could possibly involve
nuclear tipped munitions, would draw worldwide outrage. Furthermore, even
if Washington were to condemn such an attack in its harshest terms, the
Arab world would assume that the Israelis acted with full support of the
United States. They would likely be right.
This whole sorry picture brings into focus the
ill-judged and hugely expensive pre-emptive attack on Iraq in 2003 and
the arrogant extension of the war in Afghanistan beyond the so-called
al-Qaida to the Taliban. Another Western attack on a sovereign Muslim
country would further embolden jihadists around the world.
America and its allies are currently withdrawing
from Iraq and Afghanistan without achieving the strategic objectives that
put the troops there in the first place. Indeed, the situation on both
fronts is considerably worse than it was before the invasions. As evil as
he was, Saddam Hussein was the strong man of the Middle East, who held
Iran in check.
Today, Iran dominates the chaotic situation in
Iraq. Furthermore, it now holds sway over much of Afghanistan, where the
Allied campaign has failed to deliver a victory. Instead, our involvement
there has opened the door for Iran and has widened the rifts within
Pakistan, which is now much more likely to collapse utterly in the wake
of our eventual withdrawal from the region.
These strategic setbacks to the east and west of
Iran have severely limited Washington's leverage with Tehran and have
emboldened the ayatollahs to adopt a more confrontational stance. Just a
few months ago, the Iranian government organized (through poorly
disguised proxies) a pointless attack on the British embassy which
resulted in a rupture of diplomatic relations between the two countries.
Such moves may be designed to increase international concerns that Iran
is simply reckless and unpredictable.
While talking tough, the U.S. is showing ever
greater concern with the possibilities of an uncontrollable Iran. There
has been increasing chatter that President Obama is now prepared to talk
directly with Tehran, a willingness that may upset other anti-Iranian
allies such as Turkey and Saudi Arabia. If the Saudis feel sidelined or
if they come to see the U.S. as an unreliable guarantor of Middle East
peace, they may decide to abandon their long held support for American
policy interests.
As a result of the diplomatic mess, investors
should consider the renewed possibility of armed conflict in the Persian
Gulf. It should not be ignored that, in a possibly tight election this
fall, a "wag the dog" scenario with Iran is not beyond the
realm of possibility. A war, or even an escalation in tensions, could be
a deciding factor in allowing an incumbent president to maintain power.
By secretly encouraging conflict, a sitting president could find
substantial political benefit, even while maintaining dovish rhetoric.
Although Obama came to office promising change, some things never do.
In light of these persistent concerns (as well
as recent OPEC pronouncements that $100 oil poses no threat to global
economic health) investors should harbor no illusions that the recent
surge in petroleum prices will ebb anytime soon, if ever. Investments
that offer exposure to non-Middle East petroleum should beckon.
John Browne is a Senior Economic Consultant to
Euro Pacific Capital. Opinions expressed are those of the writer, and may
or may not reflect those held by Euro Pacific Capital, or its CEO, Peter
Schiff.
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