Iran May Ignite a Global Explosion

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This is the first of a pair of articles on the rapidly declining situation in Iran. Read the second article here.

Just over a week ago, my Fool colleague Dan Dzombak penned an excellent article about the impending boycott of Iranian oil by at least a portion of the country's worldwide customers. As he noted, a significant embargo -- designed to convince the powers-that-be in the rogue country to halt their concerted effort to develop nuclear weaponry -- would likely spike world crude prices more than most of us care to contemplate.

So we're approaching $130 a barrel?
Obviously his conclusion was spot-on. In fact, as recently as Thursday, the International Monetary Fund pegged the fallout from an embargo (unaccompanied by violence) at a 30% jump in crude prices. Such a jump would appear to benefit the likes of ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) , if one's analysis were limited solely to peering at the certain blastoff in crude prices.

But beyond that, given the severely deteriorating economic situation in Iran, along with the growing chaos that's now permeating the Middle East and the intensifying disdain from Russia's Putin regime toward the U.S., the consequences also could include a wide-ranging military conflagration, likely enveloping much of the developed and developing worlds and ratcheting energy prices even higher -- along with setting off far more horrendous consequences.

Nevertheless, recruiting by the U.S. among importing nations to increase participation in the boycott has kept travel agents scrambling. Treasury Secretary Timothy Geithner has traveled to both China and Japan in a thus-far-unsuccessful effort to coax the two Asian countries onto the embargo team. And conversely, Chinese Premier Wen Jiabao has trekked through the Middle East, meeting with officials from Saudi Arabia, the United Arab Emirates, and Qatar in an attempt to line up replacement sources for Iranian crude.

Scoring in Africa
Even Africa has garnered attention from U.S. diplomats as part of our nation's worldwide swing to isolate Iran and its oil. Somewhat surprisingly, the likes of Angola's state-owned oil company, Sonangol, and South Africa's big energy and chemicals company Sasol Ltd. (NYSE: SSL  ) appear to be distancing themselves from involvement with Iran.

Indeed, Angola's relatively ready acquiescence is really two-pronged, since it is both a major African energy success story and the occupier of the second spot among crude suppliers to China, behind Saudi Arabia but just ahead of Iran. But as for China itself, with imports from Iran having leaped by 49% in the first half of 2011, and despite its own concern about an Iranian nuclear buildup, it continues to ruminate about its role -- or lack thereof -- in an embargo.

Last, but hardly least, earlier this week the European Union formally agreed to a ban on purchasing crude from Iran, beginning in July. With Europe accounting for about 20% of the oil shipped from the Middle Eastern country, the leaders of France, Germany, and the U.K. carefully emphasized, "We have no quarrel with the Iranian people, but the Iranian leadership has failed to restore international confidence in the exclusively peaceful nature of its nuclear program."

Hitting a pair of majors
The EU ban won't be limited to imports of Iranian oil by its member countries. At the same time, European companies, such as France's Total (NYSE: TOT  ) and Anglo-Dutch Royal Dutch Shell (NYSE: RDS-B  ) , will be forced by July to abandon their practice of buying Iranian crude for non-EU destinations. Total, for instance, acquired about 120,000 barrels of Iranian oil in 2010, triple its European imports.

But the still-nascent boycott's effect clearly has already fallen on the shoulders of Iranians on the street, a fact that has largely bypassed our own citizenry, given virtually nonstop media coverage of the battles among Messrs. Romney, Gingrich, et al. But with the announcement of the EU's decision, Iran's currency, the rial, instantly fell by 10%, while gold prices jumped. Those results followed a plummeting of the rial against the dollar on the country's black market of up to 55% just since last month.

The earlier fall was largely precipitated by President Obama's signing a U.S. bill that will take effect later this year and will punish companies that deal with Iran's Central Bank. With all this going on, Iran's inflation rate now exceeds 20% a month, and its citizens have been scrambling to turn their capital into U.S. dollars or, barring that, gold.

A real rial struggle
The rapid drop in the rial and resulting coveting of the dollar have resulted in an increase in interest rates by the Iranian Central Bank from 14% to 21% as part of an effort to prop up the nation's currency. But with the black market quest for dollars continuing, the government has dispatched police into the streets to halt the citizenry's informal trading, which is being conducted to rid themselves of their country's currency and its drastically reduced buying power.

Iran's disastrous economic circumstances obviously played a big part in inducing threats by the country's mullahs and President Mahmoud Ahmadinejad to close the Strait of Hormuz, through which 20% of the world's oil travels daily. Beyond that, there have been other signs of mushrooming obstreperousness in the nation, including the recent sentencing of a former U.S. Marine to death on clearly trumped-up spying charges. And mobs accompanying the funeral procession of a nuclear scientist repeatedly intoned "Death to America"; the scientist had been dispatched by a bomb in his automobile as he headed off to ply his illegitimate trade for Iran's government.

There are far more events of a daunting nature occurring in Iran, helping to render it truly a tinderbox. But there's also more in the country's relationships with its Middle Eastern neighbors and much of the rest of the world that could ignite a global military conflict. We'll focus on those events in Part 2.

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We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies noted above. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2012, at 5:33 PM, xetn wrote:

    As Ron Paul has stated repeatedly, the boycott is like an act of war and will surely result in one.

    On another note, India is planning to exchange gold for Iranian oil. And don't expect the Chinese to cave.

    But the ones who will get hurt the most by the boycott will be Italy, and Greece, who like India get a significant amount of supply from Iran.

  • Report this Comment On January 30, 2012, at 5:34 PM, xetn wrote:

    I forgot to add, how high do you think oil will go after the war starts?

  • Report this Comment On January 30, 2012, at 6:23 PM, hawkise wrote:

    If one reads history this is similar to the run up to WWII. Japan was raping China and FDR decided to limit their oil thus they woke the sleeping giant.

    We are awake and will have more firepower in the gulf than most countries have at all. I'd say let's send the Gulf States and Israel an invoice.

    No hostile nukes in North Dakota.

  • Report this Comment On January 30, 2012, at 10:13 PM, Fonz56 wrote:

    Blame can be spread to other factors. The world does not need the threat of Iran. And its not Iran actually it its leader. The solution is simple! Iran opens it borders (just like other countries) to verify its nuclear program. A country that has nothing to hide, like Iran could do just that. Question: Would any nation stop Iran from entering and inspecting its nuclear program? I seriously doubt it. Hear all the noise about stopping the oil flow(good press and sell oil stocks). Last I heard it was only 6% of worlds oil. So whats the problem? I say let the Shites and Sunni(they hate each other) solve the problem. Irans people are just like us: don't like wars and value human life. Bigger problem is Israel's relationship with Iran. That's the real danger which could cause "-blood to run like rivers". And its super scary because any movement by either country could start a nuclear holocaust.

  • Report this Comment On January 30, 2012, at 10:22 PM, Fonz56 wrote:

    I don't know where the author, Mr. David Smith got his statistics, but I've never seen a quote before of 20% of worlds oil supply goes thru the Strait of Hormuz. I have heard 5-6%. A huge difference.

  • Report this Comment On January 30, 2012, at 10:36 PM, JohnMaxfield37 wrote:

    Fonz56 -

    <<I've never seen a quote before of 20% of worlds oil supply goes thru the Strait of Hormuz. I have heard 5-6%. A huge difference.>>

    There are a number of sources for that statistic -- one being the US Energy Information Administration: "Hormuz is the world's most important oil chokepoint due to its daily oil flow of almost 17 million barrels in 2011, up from between 15.5-16.0 million bbl/d in 2009-2010. Flows through the Strait in 2011 were roughly 35 percent of all seaborne traded oil, or almost 20 percent of oil traded worldwide."

  • Report this Comment On February 01, 2012, at 3:59 PM, woundedsoldier wrote:

    I don't see oil getting that high. The price of oil has gone way up while the price of oil has fallen.

    That is not logical unless their is corruption in the

    oil companies or the Hedge funds cheating Americans. Everyone should demand the Attorney General check on the wide spread corruption. Also their should be a law against Hedge funds buying oil and jacking up the price. It should be considerd against national security.

    They rob Americans and our allies out of hundreds of billions annually. I know the Republicans would side with the oil companies and Hedge funds.

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