Yesterday I suggested that we are seeing signs of the fundamentals for oil starting to weaken, setting up the possibility that oil could finish next year quite a bit lower than this year, possibly under $40/barrel. Now let's turn to the flip side. Other than the usual production problems, contract disputes and strikes that have amplified the oil-price roller-coaster ride for the last couple of years, there are two geopolitical situations that contain the seeds of a genuine oil-supply crisis. I've been talking about both for a while: Venezuela and Iran. As much as I've been on President Chavez's case, my gut feeling is that we will find a modus vivendi with him; I'm much less sanguine about Iran, and less sure than I was previously that time is on our side, there.
While I disagree with Charles Krauthammer well over 50% of the time, I believe his Wall St. Journal op-ed on Iran (subscription required) is 100% right. The country's duly-elected president is a rabid nut-case, though unfortunately not without like-minded support in the region. And based on what the IAEA has reported, the chances of his having access to nuclear weapons within his term of office are uncomfortably high. President Ahmadinejad is literally a Wild Card.
Furthermore, I have little faith that the international diplomatic processes now underway will succeed in denying Iran the means of developing nuclear weapons. Given the nuclear technology that has circulated in black-market channels and the state of Iran's missile programs, the only missing ingredient is weapons-grade Uranium or Plutonium, and that is precisely what Iran's present nuclear program appears designed to deliver. The relationships Iran has cultivated with Russia and China virtually guarantee they will be allowed to complete their work.
Although the other regional and global ramifications of that development are highly uncertain, the implications for oil markets are clear. Whether as a response to serious international sanctions--which I consider unlikely to be imposed--or to a pre-emptive strike against Iran's weapons complexes, the likelihood of Iran's oil being withdrawn from the market at some point is very high. That would send oil prices to record highs. Ironically, the real-dollar highs that would be broken would be those from the last Iranian oil crisis, back in 1979.
So what's the probability of this happening in the next twelve months? Without any scientific basis I'd say at least 25%. If it happens, it could provide just the kind of crash-program impetus that supporters of alternative energy have been looking for. At the same time, it makes the shares of oil-company stocks a pretty interesting option play, even at their current high prices.