Sunday, May 4, 2008

"Oil is Expensive Because Oil is Scarce"

I find it amusing that the neo-classical economists (Michael Lynch and Dan Yergin come to mind) cannot seem to grasp this simple concept.  After all, it is one of their founding precepts.  Ah yes, "no man can understand that which his salary requires he not understand".  

Politics and Oil have gone hand in hand for well over a century - certainly back to the original Anti-Trust regulations of the early 20th century (I wonder how many Americans can define a "Trust" as was understood at the time...).  The first Anti-Trust legislation was directed at the only "Big Oil" we had:  Rockefeller's Standard Oil Co.  

Listening to the pandering of the 3 presidential candidates to the masses on gasoline prices is an ongoing lesson on the state of our capacity to think - approaching "E" on the fuel gauge(s).

But ponder this for a moment:

Iran just called the U.S.'s bluff.  The fact that we are so close to a military confrontation with the country whose shores line the highway that nearly HALF of the world's exported oil travel's through seems to be lost on the financial markets, not to mention the folks running and depending on the myriad supply chains for goods and services in the U.S.

Let us play a little "What If..." shall we?

What if the U.S. means it when it says that Iran will not be permitted to gain nuclear capabilities?  Since the Iranians do not appear to be dissuaded by words, and there is NO shot of a trade embargo against them considering how much the world needs the oil exports...  The only option left is military engagement.  

Iran is not a small country.  Over 65 million people live in the country, and Iran is not a "gray" zone like the U.S., Japan and Western Europe.  The vast majority of the population is young, and Iran has 5 % per more men then women.  In other words, Iran has the "perfect" demographic for a war of attrition, and Iran possesses a vast intelligence and spy network that might wreak havoc on the West's transportation system (just think how favorably an American administration would be viewed by the American people if a couple of passenger jets were brought down by Iranian saboteurs).  But that is all chump change when compared to the really big issue.

Oil tankers are not military vessels. They are owned by for profit corporations, operated by for profit corporations, and insured by for profit corporations.  These tankers are, for the most part, not American.  If the U.S. and Iran engage militarily, these tankers will not operate in the Persian Gulf, and cannot be ordered to do so by an American administration.  Within hours of hostilities, the flow of oil out of the Gulf will cease altogether, and U.S. service stations will be emptied by American drivers attempting to fill up their vehicles (240 million vehicles with an average 1/2 tank trying to go to a full tank = 10 gallons per vehicle, not including trucks and aircraft, 2.4 billion gallons/42 gallons to a barrel = just over 57 million barrels = more than the U.S. holds in "bulk storage", and this does not take hoarding into account.), within several more hours the same might also be true of American grocery stores, certainly no more than a few days.

You see, in an Iranian engagement and with no oil coming out of the Gulf, the export patterns of the unaffected exporters would be significantly disrupted, to say the least, in order to extort as much as possible under the new circumstances.  Within weeks, surreal shortages of oil would hit the U.S., and the effect on trucking and "just in time" inventory management would mean that the National Guard would be involved in the distribution of food and heating oil, with heating oil likely being, for the most part, unavailable.

In the absence of heating fuels, considerable damage would occur to U.S. housing and commercial buildings as pipes freeze and burst, leaving these heating and plumbing systems inoperable even IF fuels should become available.

Lest you think that the U.S. could use electric heat or Natural Gas to substitute for the missing oil:  The 7% or so of American electrical generation coming from Oil would cease to exist, and with the absence of transportation fuels maintenance of equipment and infrastructure would be severely curtailed.  Damage from lightening strikes, storms, tornados, hurricanes, etc... would not be repaired (South Florida and other hurricane vulnerable areas should give that some thought).

Food production, processing and distribution would be SEVERELY affected, as would sanitation (you know, the ability to flush your waste away), healthcare, law enforcement and security, education... you get the idea.

I am no political scientist, but it would seem that the probability of an American/Iranian military showdown over nukes is (much) greater than ZERO, which means all of the issues above have a (much) greater than ZERO probability, too.

By the way, for importing countries that have little to no domestic oil production (Israel, Germany, Japan come to mind) things will be infinitely worse.

Still, all of the above would be far better than a WWIII nuclear exchange initiated in the Persian Gulf.  

Talk about a rock and a hard place.

Yours for a better world,

Mentatt (at) yahoo (d0t) com


Anonymous said...

If I may extend your "what if" scenario just a bit more-and strap my tinfoil hat on extra tight to boot-the following appears logical to me.

A war with Iran would be lost, just like the US is losing the war in Iraq and Afghanistan. It may take ten or more years, but even if the US uses nukes, the war would be lost as many other countries would refuse to have anything to do with the US.

So why is the present admin beating the war drums? My tinfoil hat tells me that it is for the same reason there was a 'surge' after the 2006 elections. Watch the magic wand, sheeple, not the hand dipping into your pockets. This focuses attention on the pending war with Iran, allowing us to 'forget' about Iraq, Afghanistan, Colombia, our wretched economy, gas prices, etc.

Presently, huge corporations are making huge profits supplying the gov't war machine with its tools of death, and we all know that huge corporations have much more say in D. C. than very many of us 'Merkins. Therefore, these present wars will go on for as long as possible; as long as there is money to be made and/or stolen and the sheeple don't start throwing too many wrenches into the gears of Corporate Profits. A few wealthy people get all the money now, and the rest of us have to pay for it later, plus interest.

Thanks for a thought-provoking article, Mr. Jeffers!


Greg T. Jeffers said...

Thank you for your comments.

The Iranian atomic issue is not going away, and I think a thoughtful discussion of the likely outcomes is in order.

While the issues for America's economy and lifestyle are profound in the event of a pre-atomic engagement, a post-atomic engagement is cannot even be contemplated.

I would not want to be the guy/gal sitting in the oval office making THAT decision. Damned if they do/don't.

I will be blogging on this in the future.

Anonymous said...

Bush is a true believer in the coming War of Armageddon. He sees himself as playing a pivotal role in this saga which ends with the return of jesus to rule the world.

For Bush and his handlers, the possibility that Iran could even potentially procure nukes and use them to wipe out Israel has to be prevented at any cost. For these relgious fanatics, this issue overarches all other national concerns.

Anonymous said...

To to my above comment- this is just my opinion.

However, I base these comments on Bushs past comments and on this ongoing association with the most repugnant of religious warmongers ie Pastor John Hagee being the most agregious as he calls for open war against the muslim nations.

And the obscene and desperate tone of the administration's frantic attempts to create any ANY flimsy pretext for conflict with Iran can only remind one of the pathetic attempts of Joseph Goebels to justify the Nazi attack on Poland in 1939.

These are the actions of a bunch of religious thugs who are desperate to fulfill the imagined demands of the bloodthirsty old testament war god of Israel.

In short, they are violently nutso.

Greg T. Jeffers said...


I have no opinion on what the Bush Admin might do or not do in their final months. It might well be an Obama or Clinton Administration (or a McCain) that has to make a decision on whether or not to accept a nuclear armed Iran. Their decision may or may not prove, in history, to be the correct one. It is an imperfect world (not that you have not noticed, I am sure).

Sorry, but I do not share your obvious passion for politics. "Liberals" do as many dumb things as "Conservatives" where international policy is concerned, and let's face it - threats DO exist and it is certainly not the Left that is willing to risk life and limb in the military.

Would the Liberal establishment accept ANY military engagement from a Liberal President?

I have a great deal of faith in the folks at the DOD. Their commitment to our country cannot be questioned EVEN IF THEY ARE NOT PERFECT.

In the final analysis, I am speaking only of the probabilities of certain outcomes in the Iran/U.S. confrontation. Since I am COMPLETELY without influence on the matter directly, I confine my input to that which I might have some positive impact - namely having an open and frank discussion of the probable impacts such a confrontation would have on common folks like me should an engagement occur - irrespective of whether it is the U.S. or IRAN that initiates it.

I welcome your comments, but I remain firmly outside of American political opinion.

Best Wishes


Anonymous said...

I think the US situation is a very poor one strategically. Lets consider the facts. Iran is not a rogue state headed by a madman as is portrayed in the media. Some of his rhetoric is designed to inflame and to stoke popular opinion inside his country. His comments on wiping out Israel are definitely concerning. However, what is clear is that the actual political behavior Iran has displayed is very cautious and level headed. They have kept the number of military provocations surprisingly low for a country that has US special forces operating inside its borders. It is very circumspect in meddling in Iraq also. The fact that it is meddling is inescapable (after all it is a neighbor state and a former enemy) but it is not overt about it.

In my opinion the political issues are secondary here to the economic issues. 1. Oil. They export it. They are not taking US dollars for it. That is a big problem.
2. Oil. They have opened a new oil trading bourse on Kir island. They are not trading it US Dollars.
3. Oil. Forty Percent of it flows through straights of Hormuz. They can shut it off with one Russian Sunburn or Chinese 802 missle. They have plenty of those.
4. Oil. They can destabilize all other gulf states like Saudi with an attack on Ras Tanura loading facility or Abcaic refinery.

So here you have it Missiles, Money and Mullahs. Iran has it all. I don't care how many aircraft carriers US has in the Gulf that just creates a more target rich environment for the missile operators.

Now I don't believe that US has the ability to take on Iran militarily without a nuclear first strike. There are not enough US soldiers for boots on the ground just to hold the country, much less take it over. Such a strike would not be tenable without a significant provocation that could be pinned on the Iranians such as a terrorist incident on US soil. Like a dirty nuke in some Midwestern city perhaps. It would have to be big to get America mobilized and get draft instituted.

Aside from that all it will be is just saber rattling to try to keep them in line a bit. Unfortunately Iranians don't seem to scare easily. They are moving forward on all fronts to contain American influence in the region, ally with China and Russia and undermine Oil for dollars circulation which directly impacts the dollars reserve currency status.

If the military confrontation takes place I would agree with you completely. It would be a seminal event that would change the world. The economy such as it is would not survive such a hit. All thing we take for granted would change. Therefore, everything will likely be done to keep this just to posturing. No one and I mean NO One would want such a confrontation. Not Neocons. I don't buy that Bush is a religious zealot and a suicidal maniac. Certainly not Israel because they will likely be wiped off the map in the aftermath of this war. And not Iran either. The loss of lives would be horrible.

So we are just playing at tough guys here. Lets hope it doesn't escalate.

Yours for a more peaceful world,
Chuck H.

Greg T. Jeffers said...


I have no opinion in the strategy and tactics of the U.S. military. I do have an opinion of how difficult Iran would be and some of their likely tactics, but I am an arm chair Private...

More importantly, your Oil 1 thru 4
is well reasoned, and is the real story.

I don't "believe" any particular outcome. The event is unknowable. All are worth taking into consideration for the well being of you and yours.

Be well