U.S. Iran Policy: It’s All About the Oil

Bearing in mind the recent developments in the Middle East, I suspect that a geo-political disaster is around the corner. I hope I am wrong but it increasingly looks as though either Israel or the United States will attack Iran over its “nuclear program”. I had first forecast this in August 2005 and believe my fears will be validated in the near future due to the current U.S. Iran policy. Over the past few weeks, Washington has increased its rhetoric over Iran’s “nuclear program” and dispatched the USS John C. Stennis and USS Eisenhower aircraft carrier groups to Iran. This is an ominous development and suggests that the United States may be at the brink of another war.

History has shown that all major bull-markets in commodities have coincided with rising political tensions and war. In other words, whenever shortages in natural resources caused prices to rise, nations did everything in their power to secure their share.

The commencement of the current commodities bull-market coincided with the invention of the “War on Terror” and we have already witnessed attacks on Afghanistan and Iraq. In my opinion, we are currently in the early stages of a new war-cycle as the United States desperately tries to secure its future energy supplies. Previously, Iraq was accused of developing weapons of mass destruction and now Iran is being targeted along the same lines. So, if you are in the camp which believes that the United States is genuinely worried about Iran’s “nuclear program”, you have to wonder why then does the U.S. not attack North Korea? The answer to this question lies deep within the earth’s crust!

There is no doubt in my mind that the United States is extremely interested in Iran’s oil and the ongoing “War on Terror” is really about dominating the resources in the Middle East. You must understand that the United States is highly dependent on foreign oil (it imports 13.8 million barrels of oil daily) and with China and India now using up more oil than ever before, the US is using its military prowess to secure its future energy supplies. It is interesting to note that Iran is the 6th biggest oil exporter and ships out 2.39 million barrels of oil per day. Furthermore, Iraq exports 1.82 million barrels of oil per day. So, you can see why the United States is so interested in bringing about a regime change!

At present, the financial markets have not factored in a military conflict in the Middle East, making them especially vulnerable to turmoil. Therefore, if there is an attack on Iran, we may get sharp knee-jerk reactions in the capital markets. Under such a scenario, emerging-market assets would be the most affected. In fact, stock markets will probably suffer across the board and the price of oil will appreciate sharply. If Iran’s response is muted, the spike in the oil-price may be temporary. However, if Iran decides to stop its exports and disrupt the flow of oil through the Straits of Hormuz, the price of oil could easily reach $100 per barrel. This outcome would be a catastrophe for the energy-dependent global economy.

In addition to this, safe haven assets such as government bonds, gold and oil will thrive. If my assessment is correct, gold and energy stocks may end up appreciating significantly whilst the general stock markets decline. Accordingly, we have reduced our exposure to the emerging-markets and our managed-accounts are now heavily invested in oil and precious metals.

Our planet is rapidly approaching its oil-production peak. In fact, some leading geologists argue that we are already past that point.

It is important to understand that oil-production follows a bell-curve. This is true whether we are talking about a particular oil field, a nation or the planet as a whole. Once more than 50% of the reserves are depleted, the rate of oil production enters a rapid and irreversible decline.

Today, several oil-provinces around the world are producing significantly less oil when compared to their record-production levels. Despite phenomenal breakthroughs in technology, these regions have failed to sustain their record-high output levels and this is proof of the concept of peak oil. If we look around today, the United States is past its peak, the North Sea is in decline, Indonesia is struggling and even Mexico has announced that its largest oil field is past its peak-output. Although these regions still have massive reserves, the rate at which they pump oil out of the ground on a daily basis has entered a serious and permanent decline.

In the recent past, non-OPEC nations increased their production and managed to compensate for the declining output levels elsewhere in the world. However, when you take into account the fact that these countries are also faced with geological limitations, it becomes clear that unless we discover gigantic oil fields very quickly, our world will find it extremely hard to keep up with rising demand.

When discussing “peak oil”, it is also important to mention that over the past 35 years, we have discovered just one gigantic oil field anywhere in the world. For sure, there have been some discoveries in different parts of the world, but only a single world-class oil-field has been discovered in over three decades; Kazakhstan’s Kashagan Oil Field in the Caspian Sea. This is despite all the technological achievements over the same period. In other words, unless we have been incredibly unlucky and there is indeed a jackpot waiting to be found, this is not a healthy sign.

To complicate matters further, demand for oil continues to grow rapidly. At present, our world consumes roughly 84 million barrels of oil per day. If current growth rates continue, Asia’s demand alone will increase from 22 million barrels per day to approximately 40 million barrels by 2020. According to the U.S. Energy Information Agency, global consumption is projected to increase to 103 million barrels per day in 2015 and 119 million barrels by 2025. In order to meet this explosive demand, global production must increase by 45% – about five times the maximum annual output available from Canada’s oil sands.

So, you can see that our world faces an imminent energy crisis, which may cause an escalation of resource wars over the coming years. Normally, I do not like to make bold forecasts, but I can say with confidence that the era of cheap oil is over. Moreover, I also suspect that things will get a lot worse on the geo-political front before we return to a period of world peace.


Puru Saxena
for Markets and Money

Editor’s Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication. An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

Puru Saxena

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Puru Saxena

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edward watson

God help us if he’s right.

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