The Iran situation is getting critical. It is clear that Tehran is determined to get a nuclear bomb – no matter what the domestic costs.
US president Barack Obama has promised that “I do not have a policy of containment; I have a policy to prevent Iran from obtaining a nuclear weapon”. Israel is also dropping big hints that it will take action on its own.
On top of this, Saudi Arabia has indicated that it will increase oil production significantly. It says that it wants to prevent crude from becoming too expensive, and thus destroying demand in the long term.
However, this dramatic move raises suspicions. Does Riyadh know something that we don’t? Has it been told that an airstrike is going to take place soon? Or should we take it at its word?
So which is it? And what is going to happen next?
Sanctions aren’t going to stop the Iranian bomb
It cannot be emphasised enough that although sanctions have caused major disruption to Iran’s economy, they aren’t working.
There are also questions as to whether the US is really committed to them. Even although they do not come into force until July, the US has had to make major concessions. It has had to back down from its threat to penalise nations that continue to import Iranian oil – granting exemptions to 11 countries. There are rumours that more may follow.
American promises that it will attack Iran if it builds a bomb are less meaningful than they might seem. After all, if the US fails to attack before Tehran gets a bomb, it is hardly likely to do so afterwards. Indeed, it seems that all the tough talk from Obama may be designed to stop an Israeli strike.
Therefore it all boils down to Israel.
From a strategic point of view, it seems a no-brainer. Past history would suggest that Iran would either use a bomb to attack Tel Aviv directly, or ramp up its support for terror groups.
Therefore, a strike seems the only option.
However, real life – as ever – is more complicated. Public support for Israel means there is no way that the US would stop – or even condemn – any action. But it wouldn’t necessarily back it either. Because of this, the Israeli cabinet is split on action, with only a small majority (eight for, six against) wanting a strike. Many in the military and intelligence services are opposed.
A strike is probable, but not inevitable
Israel is still more likely than not to act. It is simply too dangerous to rely on sanctions, while nuclear missiles in the hand’s of Iran’s leadership would be a disaster for both it and the wider region.
Saudi Arabia understands this. Its decision to open up old oilfields, including one closed in 1980, and order new tankers seems like an attempt to take advantage of the likely spike in prices.
However, the pace of the move is not strong enough to suggest that it has some special knowledge. It looks like a decision based on an educated guess – not on a tip off.
There are also other factors. US banks and funds are holding more physical oil. Saudi Arabia may even believe that prices will fall back, and simply wants to sell as much as possible before this happens. Be aware that the country has past form on promising to expand output, only to change its mind later.
Oil is not the best hedge against a war in the Middle East
As we’ve pointed out before, higher oil prices could hit the global economy – derailing any recovery. This could have a very negative effect on your portfolio. However, the danger of an Israeli strike is already partly priced in.
It also needs to be pointed out that, in the long term, prices could fall. Political change hit the global economy, could lead to new supplies of oil reaching the market. A weaker global economy is also hitting demand.
This means that, for our money, the best way to protect against more trouble in the Middle East – in terms of risk/reward – is gold. Even without a war over Iran, Capital Economics predicts that the breakup of the European single currency and further monetary easing could push the price of gold as high as $2,200 an ounce.