A new Iranian hostage crisis

Oil may be about to boil, perhaps up to $100 per barrel...

WAY BACK in Nov. 1979, a group of radical Iranian students stormed the US embassy compound in Tehran.

   They held nearly 70 Americans hostage for the next 444 days, helping to push oil to a (then) all-time record and sending gold above $800 per ounce.

   What was the goal? Well, it certainly cost Jimmy Carter the 1980 presidential election. Carter was humiliated, portrayed as ineffectual and powerless to the American public.

   Iran eventually released the hostages, about four minutes after Ronald Reagan was inaugurated as the next American president.

   The Iranian regime doesn’t have an election to influence in Britain today. It looks like Gordon Brown will replace Tony Blair. But what is the goal, then, of this Iranian hostage-taking?

   Our guess is that Iran is trying to put pressure on all of Europe to back off on U.N. sanctions. Specifically, the Iranians may also be trying to give the next British Prime Minister every reason to quickly withdraw British forces from Iraq.

   But intelligence analysis is not our beat here at The Daily Reckoning. We are bad at games of strategy, especially Stratego, Battleship, and chess.

   Sticking with markets, Iran’s action reminds us that the oil price is inherently tied to the geopolitical tension in the Middle East, the world’s largest oil exporting region and home of the world’s largest oil reserves. More tension keeps oil prices high, which is good news for hydrocarbon bulls – if not for British sailors and American marines.

   Also, the current row points out just how different this time is from 1979.

   Investments in alternative energies and fuels will remain urgent and economic as long as oil prices remain influenced by the region’s politics. In the last two years, as we’ve crept closer to a direct conflict between Iran and America, the oil price has bubbled but not boiled.

   Oil may be about to boil, probably in the region of $100 per barrel. Granted, things always seem to come off the boil at the last second in the Middle East. No one really wants oil shipments disrupted from the Gulf. It’s only worth something if you can sell it, right?

   But the Americans need it. The Chinese need it. Heck, even the Iranians need it. Iran is an importer of refined fuels, lacking itself the capacity to turn its crude oil into transportation fuel.

   An oil crisis is not really in anyone’s long-term economic interests (although oil exporters surely appreciate the huge profits from these spikes).

   But what is more likely to happen is that energy prices creep back up to their levels from May last year and then decouple from the rest of the market.

   Eventually, high global energy prices slow global growth, leading – at least in theory – to lower energy prices. Thus another way of saying the best cure for high prices is higher prices.

   Either way, the next month is traditionally a volatile period for markets. It’s certainly shaping up that way.