Iran's Increasing Woes Could Hike Oil Prices

Crude prices bobbed about like a cork in a storm last week and into Monday. On Thursday, The Wall Street Journal attributed the prior day's $3.75 per barrel tumble to soft economic data from China and, to a lesser extent, fading concerns among traders about the possibility of a military conflict between Iran and Israel.

The first explanation is probably accurate. After all, China's leadership is apparently in some state of disarray, and a lack of transparency in the country's economy prevents us from accurately assessing the likely length or depth of its slowdown. But the indicated notion about Iran may be premature. In reality, Iran's President Mahmoud Ahmadinejad and the country's mullahs are juggling several conflicts, any one of which could expand into a regional conflagration.

The traders' notion about the current Iran-Israel relationship likely stems from demonstrations by the citizenry in Tehran, along with the laser-like focus of the U.S. media on our country's presidential race. Nevertheless, it appears that events in the Middle East are becoming more daunting, almost by the day. On that basis alone, I'm inclined to urge Fools to be certain to include energy companies in their portfolios. I'm referring to the likes of the kingfish, ExxonMobil (NYSE: XOM  ) , or drilling equipment provider, National Oilwell Varco (NYSE: NOV  ) , or EOG Resources (NYSE: EOG  ) , a solid independent producer.

Largely because of the sanctions, none of those companies is working in Iran. Indeed, even PetroChina (NYSE: PTR  ) abruptly pulled out of Iran in mid-summer. However, oilfield services giant Schlumberger (NYSE: SLB  ) continues to function in Iran under prior contracts, although it apparently intends to wind down its activities in the country by 2013.

Israel still eyeing Iran
In looking at the potential for an outbreak of hostilities between Israel and Iran, the linchpin for a lessening of that likelihood would be clear evidence that the latter country's powers that be have rethought their determination to develop nuclear weaponry. Thus far, despite the recent uprisings in the country, that evidence is nonexistent.

As such, we'd be wise to note that it was just in September's final week that Israel's Prime Minister Benjamin Netanyahu told the world in a speech at the United Nations: "At stake is not merely the future of my own country. At stake is the future of the world. Nothing could imperil our common future more than the arming of Iran with nuclear weapons." For emphasis, he added: "To understand what the world would be like with a nuclear-armed Iran, just imagine the world with a nuclear-armed al-Qaeda."

Merchants on the march
I'm at a loss to locate in those comments any indication that Israel has suddenly become less resolute in its determination to halt Iran's progress toward nuclear capability. But that's not the only contentious event on the plates of Ahmadinejad and the mullahs these days. As noted, Tehran's main bazaar was the site last week of an outbreak of demonstrations by shopkeepers, merchants, workers, and activists in the wake of a plummeting of the rial, the country's currency.

That collapse was precipitated by the imposition of the U.S.- and EU-led sanctions, which are intended to prompt Iran's leaders to rethink their nuclear program. The sanctions' result has been a two-week drop in the rial from 23,000 to the dollar to 40,000 to the dollar. Rather than blame the countries that imposed the sanctions, however, the demonstrators shouted such slogans as "death to the dictator" (Ahmadinejad) and "we don't need nuclear energy."

The reaction in some quarters of the West was that the demonstrations could lead to a regime change in the rogue country. But while such an event could occur, it seems unlikely that Iran's supreme leader Ayatollah Ali Khamenei and his underlings, along with Ahmadinejad, would step down obediently without first exacting a painful price on the country and possibly the region.

Further, it's difficult to image an escalation in the protests without assurances to the participants that the West (read: the U.S.) would lend meaningful assistance, even including military help. After the U.S. failed to support Iranian protesters following their country's tainted elections in 2009, it seems unlikely that a scenario would emerge anytime soon that would pit millions of disenchanted citizens, along with western backers, against Iran's leadership.

Could Turkey gobble up Syria?
Iran also remains heavily involved in supporting -- both financially and militarily -- the Syrian regime of the dictatorial Bashar al-Assad in his efforts to fend off that country's bloody uprising. Ominously, that conflict spilled into Turkey last week, as cross-border shelling resulted in five deaths and has precipitated several days of Turkish and Syrian mortar and artillery exchanges. NATO, of which Turkey is a member, is clearly attentive to the deteriorating situation and the dangers of it spreading across the region.

It's worth noting that Russia, a supporter and ally of both Iran and Syria, forced a softening of the language in a U.N. statement condemning Syria's action. At the same time, Iran's bazaar protesters displayed resentment at their country's efforts to prop up Assad with shouts of "Leave Syria alone; think of us."

The Foolish bottom line
Admittedly, circumstances in Iran are highly complicated, and that's my point: They're far too complex to assume that, for instance, a day of demonstrations portends an impending regime change and immediate tranquility in the rogue country. As such, Fools would be wise to add several solid members of the energy sector -- such as the three named in the third paragraph above -- to My Watchlist.

Fool contributor David Lee Smith doesn't own share in any of the companies named in this article. The Motley Fool owns shares in ExxonMobil. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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