Oil spikes on Iran fears

The sudden jump in oil of more than $11 to nearly $140 a barrel shocked investors and led to a stock market sell off of nearly 400 points. That, combined with an unemployment report that suggested an especially weak economy — one likely in recession — creates both a new mood of uncertainty and further pressure on the value of the dollar. What is going to happen?

While the rise in oil prices over the last year is in large part attributable to supply and demand concerns — production is stable while demand continues to increase — an $11 a barrel rise in one day can only be attributed to panic. And that panic has one clear cause: fear about Iran. Israeli Prime Minister Olmert just concluded a visit to President Bush, ostensibly to push the case against Iran. Rumors are rife that Israel is planning some kind of strike against expected Iranian nuclear sites. And though only 7% of the US public supports a strike on Iran, Democratic Presidential Nominee Barack Obama signaled at least his potential tolerance of a strike in his June 4th speech before AIPAC (American Israeli Political Action Committee) when he said as President he would do everything in his power to prevent Iran from getting a nuclear weapon. For impact he repeated everything twice. If that doesn’t hint at military force, what does?

To be sure, Obama’s comments were in the context of arguing for diplomatic efforts to deal with Iran, and certainly did not condone a strike, but given all the speculation, oil traders had to think seriously about what any conflict involving Iran might mean for world energy markets. It’s not pretty.

Almost 25% of the world’s oil flows through the strait of Hormuz, a narrow passage way (55 Kilometers wide at its narrowest) at the entrance to the Persian Gulf. Iran has repeatedly threatened to close the strait, but US military estimates are that they could only do so for a short period of time. Perhaps. But a sudden disruption of oil at that level would push prices up dramatically. And, should Iran manage to threaten or close the strait for a longer period of time, we could be seeing oil at over $300 a barrel — or more. More worrisome would be in an attack on Iran would cause the Iranians to unleash Hezbollah on Israel, and foment real chaos in the region. This would certainly risk shutting down Iraqi oil production, and could even threaten the Saudis and other Gulf states. Given the impact even rumors of war can have on oil prices, the greater the conflict in the region, the more disastrous the effect on oil prices. The fact that the markets think an Iranian crisis very possible suggests that those who analyze these things for a living are concerned.

Already we are seeing the current energy crisis have a troubling ripple effect through the economy. GM is closing a number of SUV plants, suggesting they see high oil prices as permanent. Airlines are cutting flights and laying off workers as fares increase. In the US businesses and factories are in danger of being shut down by high fuel prices, while consumers must devote thousands of dollars each year extra to pay for energy and fuel. In a time of tight credit, this has a profound impact on consumer spending and thus the economy. Even if nothing else changed, we could be looking in the face of a far deeper recession than people realize, the economy isn’t showing the resiliency of the past.

If Iran is hit, there is a real possibility that prices will go so high as to push the economy into something akin to a depression and, if the crisis lasts very long, there may be no clear way out. The danger is all too real.

So what can they be thinking at the White House? First, one cannot underestimate the power of groupthink. Groupthink occurs when a small group puts group unanimity ahead of critical reflection on the issue at hand. Symptoms of groupthink include a belief in the inherently morality of the group, an overestimateion of their own power, an underestimation of their adversary, and a belief that because their cause is just, the ends justify any means taken. They become convinced that they are certain to succeed. Voices of dissent are either silenced or they self-censor, the result is that even those who we entrust with awesome power can get caught in a kind of alternate reality. Irving Janis described this in his classic book Groupthink, in which he connected the phenomenon with foreign policy fiascos. One certainly could see some evidence of groupthink in the advisors around Hillary Clinton towards the end of her campaign, believing they still would win.

If groupthink is present, the advisors around President Bush, already smarting from the fact that Iran is winning in Iraq, having heavy influence on the government and preventing the US from establishing a pro-American regime, may be convinced that Iran is close to having a nuclear weapon and it is absolutely necessary for the US to do whatever necessary to prevent it. In groupthink the mix of over-confidence in their own capacity along with underestimation of the opponent could lead them to think they can simply smack Iran hard, setting back significantly their nuclear progress, if not to altogether halting it. The dangers described above would be seen as unlikely: Iran will not see such a response in their interest, if the attack is quick and surgical it’ll be over quickly and can be controlled, and dissidents might even use this as an excuse to rise against the regime. The risks of acting are thus seen as minimal compared the risk of not acting. With top level advisors assuring each other that they can pull this off, a plan can be developed that sounds reasonable and almost certain to succeed. President Bush, perhaps thinking he is doing a favor for his successor by removing this obstacle — or making sure that it is removed lest an ‘appeaser’ take power — may feel it’s a decision he cannot avoid.

Yet, as shown with the decision to invade Iraq, plans can go very awry and even the slightest miscalculation can lead to fiascos. In the case of Iran, this seems likely — it’s unlikely Iran would take such a strike laying down. And once they respond, a dynamic could ensue that assures economic disaster in the West. Indeed, the White House may be underestimating the fact that Iran understands how vulnerable the western economy is right now, and thus they — perhaps caught up in their own groupthink — might see this as the perfect time to try to create a major crisis. I do think that the odds are against a strike, it’s a bit scary to realize that we might be just one bad decision away from major disaster.

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