Dear Wealth Daily readers,
Forget about global warming, the summer driving season and even the impending crisis from peak oil. We know oil prices are going to skyrocket based on one factor.
Geopolitics is a delicate balancing act. All it takes is one tiny flake to snowball into a global crisis.
On June 14, 1914, a man was killed as he was driven down a street in Sarajevo. The outcome changed the world forever. The man who died was Archduke Franz Ferdinand.
Blaming the Serbian government for the assassination, Austria-Hungary demanded they bring the assassins to justice. Unsatisfied with their response, Austria-Hungary declared war on Serbia on July 28, 1914.
Because of a treaty with Serbia, Russia began mobilizing its army to aid its ally.
Germany then declared war on Russia because they felt the Russian mobilization was an act of war against their ally, Austria-Hungary. France soon jumped into the fray because of a treaty with Russia. They declared war on Germany. Bounded by a treaty with France, Britain also declared war on Germany. Then Japan, allied with Britain, declared war on Germany too. Italy chickened-out of their alliance with Germany and Austria-Hungary–no shock there–and the U.S. (for one of the last times) didn’t stick its nose in other peoples’ business.
The rest–as they say–is history. One flake had snowballed into a global boulder.
Ninety-three years later, the game hasn’t changed…just the players. And nobody has learned their lesson.
The setting for geopolitical tension has shifted to the Middle East. But now the stake is oil.
This morning, oil broke out over $63 a barrel, reaching a three month record high. Those prices are set to break last July’s record of $78.40 a barrel…even potentially break past $100 a barrel. The latest surge is coming from Iran’s actions over the last few days.
So where to begin?
Who Needs OPEC Anyway?
OPEC has long been the driver behind oil’s prices.
It’s no secret that Iran covets higher oil prices. Let’s face facts, higher oil prices are essential for Iran’s economic success. Production from their aging fields has been in decline over the last few years. Higher prices mean they can sell less oil without losing revenue.
But one thing Iran has taught us is that they don’t need OPEC to drive up oil.
They can do that all by themselves…and its frightening how easy it is done.
Consider Iran’s defiance over their nuclear program. Every time they are pressured to stop enriching uranium, Iran thumbs its nose at the global community. And why not? Each time they do so, oil moves upward.
Do you find it a coincidence that ever since Iran’s nuclear program was discovered in 2003, the price of oil has doubled!
On Saturday, March 24th, the U.N. once again imposed its preferred method of punishment–stricter sanctions. This time around they adopted resolution 1747. It applied a new set of restrictions on Iran’s arms exports, its state-owned Bank Sepah as well as the elite Revolutionary guards.
In response, Iran announced that they were partially suspending cooperation with the IAEA (International Atomic Energy Agency) and will pursue uranium enrichment as they wish.
The reason?
Iran feels that the sanctions imposed on March 24th were "illegal". According to the Iranian Foreign Minister, "A few select countries don’t have the right to abuse the Security Council." He later added, "Actions that are illegal, unwarranted and unjustified will reduce the credibility of the Security Council."
Historically, imposing sanctions has been used to gain an advantage in future negotiations. So naturally we can assume that some kind of compromise is coming soon, right?
Think again.
Without their controversial nuclear program, Iran wouldn’t have the power to move oil prices as much. And they can’t rely on OPEC, either. At their last meeting, OPEC decided against cutting production. The next meeting isn’t scheduled until September.
One Event Sparked that Sparked a World WarOn the eve of Saturday’s U.N. sanctions, Iran threw another curveball to the global community.
They captured Fifteen British sailors for allegedly being in Iranian waters. As you can imagine, Britain is livid over the situation. They have repeatedly stated the sailors weren’t in Iranian waters, and are demanding their return.
But don’t expect this to resolve nicely. Iran is looking to charge the 15 sailors for "illegal entrance into Iranian waters." The fact that they are charging the sailors means that this could be a drawn out event–shooting oil prices up the entire time.
How high are we talking about here?
Open conflict with Iran could easily push crude oil past $100 a barrel.
The flake has already started to roll.
Until next time,
Keith Kohl
