The June light oil contract reached a new high of $75.35 in New York Friday. This development guarantees that the peak summer vacation driving season will be done under the cloud of gasoline prices in excess of $3.00 per gallon. Some of those reasons are out of our control and some are of our own making.
Certainly the decision to phase out the additive MBTE and replace it with ethanol has contributed to the shortages that have been experienced on the East Coast. Why that can't done on a slower schedule remains a mystery.
There are a number of things out of our control including insurgent attacks that are restricting increases in Iraqi production as well as continued unrest in Nigeria that threatens to lower output from the world's fifth largest producer.
The single biggest reason for volatility and potential complete upheaval in world oil prices is Iran's nuclear ambitions. Say what you want about Iran's little fanatic president Mahmoud Ahmadinejad but from a business standpoint he seems crazy as a fox.
The April 11 announcement by Iran that they had succeeded in enriching uranium upped the ante significantly in Ahmadinejad's confrontation with the West. The benefits to Iran in the Islamic world can't be fully appreciated in the United States. Coincidental to his uranium announcement was the statement that "the United States can't do a damn thing about it". Confronting the U.S. on this issue while simultaneously causing a huge increase in the Islamic world's primary export product raises his stature on a daily basis.
Islamic pride is another factor as there are a number of articles in the Middle Eastern press touting the technological advancements being made by the Iranians.
The ticking time bomb in this whole affair is the real plans of the Iranians towards Israel. Every time Ahmadinejad utters a threat to wipe Israel off the map he has the dual benefit of his stature rising with the Islamic militants as well as his oil income rising with the fear of open warfare and the subsequent reduced oil production as a result.
The question is whether or not he is walking a fine line of diplomatic chicken or is he and the Iranian mullahs bent on direct confrontation? The United States can afford to wait it out for a variety of reasons. Ahmadinejad is right that we can't do a damn thing about it at the moment. The Russians and Chinese are dead set against any attack by the US on Iran. With Iran's increasing oil wealth there are many military and civilian contracts to be given and the Russians have been the recipient of a lot of hard capital from the those deals over the years. The political climate in the US is another reason that a US led attack is unlikely.
The Israelis however are another matter entirely. The Iranians already possess significant missile capability. That capability coupled with a nuclear weapon in the hands of a religious fanatic is something that the Israelis cannot tolerate.
There is some disagreement in the western press as to how close Iran is to actually producing weapons grade materials. Make no mistake about the fact that the Israelis know just how close Iran is to building a bomb. When that is about to happen the Israelis will act to eliminate this threat. They are faced with very little choice. The only question is will it happen sooner or later?
