The Iranian Threat: War of Words, or $200-a-Barrel Oil Concern?

by David Fessler, Energy and Infrastructure Specialist, Investment U
Wednesday, January 18, 2011

As I was standing at the pump yesterday morning, watching the dollar digits tick by, the outdoor speaker blared news about Iran’s latest threat to close the Strait of Hormuz.

Here we go again. I can see it coming. Another war. But this time, it’s going to be fought over what I’m pumping into my tank. How stupid is that?

Perhaps it’s not stupid at all. Could the Obama administration be doing it on purpose? Part of me thinks so. Perhaps it’s the administration’s way to get the country refocused on alternative energy…

“No country in the world can manage the shock that results from 15 to 17 million barrels of oil not entering the market,” said Mehr, Iran’s state-run news agency. Truer words have never been spoken.

The fact is, we aren’t going to wean ourselves off of oil any time soon. Like it or not, we’re a fossil fuel-based society. Can the world stand to have a fifth of the daily oil flow cut off for any length of time?

It’s more of a rhetorical question than anything else. The answer is, “No, of course not.” The real question is: “What would it do for oil prices?”

Short-Term Mayhem

In the very short term, they would likely double to $200 a barrel as soon as the news of the Hormuz closing hit the wires. That translates to $7.00 a gallon gasoline, and even more expensive diesel.

It would have devastating impacts on the nascent economic recovery we’re experiencing here, and it would kill economic growth just about everywhere else.

The United States, along with its oil-dependent allies, will quickly reopen the Strait of Hormuz, taking out Iran’s coastal military installations in the process. While they’re at it, they’ll likely bomb the daylights out of Iran’s nuclear installations just for good measure.

My guess is they’ll leave Iran’s oil export facilities untouched. That would ultimately be like shooting oneself in the foot. But I could be dead wrong on that one, too.

How long would Hormuz have to remain closed for a disruption to have an impact? That depends where you live. Here in the United States, the President would immediately open the Strategic Petroleum Reserve, but that’s less than 30 days supply.

If Hormuz gets reopened in a week or so, prices would start to stabilize, and begin to drop in a couple of weeks. Expensive crude would absolutely hammer profits for refiners like Valero Energy Corporation (NYSE: VLO), Sunoco, Inc. (NYSE: SUN) and Tesoro Corporation (NYSE: TSO) for the first quarter of 2012, if it happens sometime in the next month.

It also means prices at the pump will remain higher longer, until the expensive crude works its way through the system all the way to your tank.

Almost lost against the backdrop of the Iranian threat is the fact that Chinese GDP growth came in higher than expected at 8.9%. That’s extremely bullish for oil prices, as that implies crude demand continuing to increase for the Red Dragon.

Long-Term Refocus?

Longer term, prices will eventually drop back to levels in the $4.00 a gallon range, and probably stabilize there.

But we might also witness a redoubling of efforts towards natural gas. It’s never been cheaper, and we have so much of it. It’s almost criminal we aren’t doing more with it.

Alternatives like solar, wind and electric vehicles will all-of-a-sudden seem like great ideas. Nothing like $7.00-a-gallon gasoline to get Congress’ attention refocused on a national energy plan, and consumers focused on alternatives.

Right now, the whole situation is very slippery, no pun intended. With the United States and Iran, it’s a dangerous game of chicken that could send oil prices soaring. We’ll be watching.

Good Investing,

David Fessler