There is no effort by any party to reduce the tensions that have been building between the U.S., Israel, the EU and Iran. Both China and Russia are supporting Iran. This crisis has the potential to spark the next act in this Fourth Turning. The next act will be a tragedy, not a comedy.

Expect $200 Oil Prices & $6 At The Pump as Iran Is Now A Full-Blown Crisis

Kent Moors: Just when it looked like we could take a breather from the Strait of Hormuz, all attention is back on Iran.

There are three reasons for this –  all happening within the last week:

  1. First was Tehran’s successful launch of a satellite, viewed by all in the region as being for military intelligence.
  2. Second, in his toughest talk to date, Iranian Supreme Leader Ayatollah Ali Khamenei voiced defiance to Western sanctions and pledged open retaliationif they are instituted.
  3. Finally, last Thursday, U.S. Secretary of Defense Leon Panetta expressed concern that, if matters continue, Israel could attempt an air-strike takeout of Iranian nuclear facilities within a month. Iran has been frantically moving essential components of its nuclear program underground to withstand such an attack.

All of this is, once again, leading to a rise in crude oil prices (NYSEArca:USO).


What’s more, the EU decision to stop importing Iranian crude starting July 1 will cripple any chance Tehran has to combat escalating economic and political turmoil at home.

Yet Khamenei’s defiant tone during his Friday prayer meeting speech indicates that Iran’s religious leadership will not wait for the system to unravel.

And that is what makes this both a full-blown and an intensifying crisis.

Brinksmanship in the Straits of Hormuz

So what’s being done?

Washington has little – leverage,  save its ability to temper an immediate escalation by Israel (leverage the U.S. can still apply, at least for the moment). It also has some indirect influence  on what the E.U. does.

Meanwhile, Saudi Arabia also is a  wild card. It will not tolerate a nuclear Iran.

And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.

Some elements of that process will be available earlier, but remember: A weapon is of little value unless it can be controlled and delivered. The logistical and infrastructure considerations need  to be in place first.

Yet with such an inevitable conclusion staring them in the face, the West has decided to embark on a risky  path…

The target here is not the nuclear project at all (over which there is less and less outside control). Instead, it has become about creating massive domestic instability to bring down a  regime.

Now, this is not about ending the theocracy. With or without Mahmoud Ahmadinejad as president or Ali Khamenei as supreme leader, Iran will remain a Shiite-dominated country. Religion decisively controls politics, and the clergy oversees the society.

The West is seeking a more moderate application of what will remain the Iranian cultural reality.

However, as the brinksmanship intensifies, so will the price of crude oil (NYSEArca:USO). Tehran, in this dangerous game of  international chicken, really only has one card to play – the Strait of Hormuz. [Related: ConocoPhillips (NYSE:COP), Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Devon Energy Corporation (NYSE:DVN)]

There has been much misinformation circulated about the strait. Here are the facts.

On any given day, 18% to 20% of the world’s crude oil passes through it.

According to the Energy Information Administration, the Strait’s narrowest point is 21 miles wide; however, the  width of the shipping lane in either direction is just two miles, cushioned by  another two-mile buffer zone.

Of greater significance, though, is  the fact that most of the world’s current excess capacity is Saudi. (This is the oil that can be brought to market quickly to offset unusual demand spikes  or cuts in supply elsewhere.) And, unfortunately, Saudi volume must find its  way through the same little strait.

If we’re unable to access the Saudi  excess, that loss guarantees the global market will be out of balance.  That will intensify the price upsurge – an upsurge that is already happening.

Now for the question I’m being asked several times a day in media interviews…

Just how bad can it get?

$200 Oil and $6 at the Pump

If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel… within hours.

Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve.

In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel. [Related: United States Oil Fund (NYSEArca:USO), SPDR Select Sector Fund (NYSEArca:XLE)]

Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.

Now let me put this in perspective  for you…

A $1 rise in the price of crude  translates into a 3.6-cent rise in the cost at the pump. Within the first week of the strait closure, therefore, pressures in the retail gasoline market will push the price to an average of $6 a gallon.

After one week!

There’s no doubt that this will paralyze economic recovery on both sides of the Atlantic. (Delivery costs on everything will go up, and diesel prices will rise quicker than gasoline.) This is apparently what Khamenei has threatened.

All energy options will be on the table, from alternative energy to tapping Canadian oil sands (and approving pipelines to transport it south), moving from gasoline to compressed natural gas for vehicle fuel, and a range of other possibilities.

Of course, none of these options can move quickly enough to stave off collapse.

Now, there is no guarantee any of this is going to happen. But the uncertainty is moving oil up today. And the uncertainty will remain in the market as we come closer to July 1.

That gives us some space to develop the investor’s reaction to events.

What the Iranian Crisis Means for Investors

Nothing happens until the beginning  of July on the European oil embargo, but the markets are hardly going to wait  that long.

I am off to London for meetings on  the crisis at the end of this month, followed by the annual session of the royal chartered Windsor Energy Group at the castle of the same name, and then  on to Scotland for a presentation at the U.K. Energy Policy Center. This crisis  will be the center of attention at all these get-togethers, and I will be  taking readers of Oil and Energy Investor along with me.

So how, as investors, do we respond  to this?

I think it requires a rebalancing your portfolio, as well as revising your exposure to both corporate dividends and the commodity value of oil and gas.

Written By Kent Moors, Ph.D. From Money Morning

Dr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment. He is the executive managing partner of Risk Management Associates International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.

Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investorand Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also directs WorldTrade Executive’s Russian and Caspian Basin Special Projects Division. The effort brings together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated electronic network allowing rapid response to global energy and financial developments.

Related posts:

  1. 20 Signs That Europe Is Plunging Into A Full-Blown Economic Depression (VGK, IEV, EPV, EWP, EWI, EUO, EWG)
  2. Investors: All You Need To Know About Iran, $200 Oil, and $6.00 Gas Prices (USO, SU, XLE, UCO, DIG, DUG)
  3. Oil Prices: Should Investors Be Worried About The Iran Situation? (USO, OIH, ERY, ERX, XLE)
  4. Outlook For Oil In 2012: Why Investors Should Expect $150 Oil Prices and How To Profit (USO, PBR, XOP, CHK, SU)
  5. Expect Much Higher Silver and Gold Prices By Year’s End (SLV, SLW, GLD, NEM)

53 thoughts on “HOW ABOUT $6 A GALLON GAS?”

  1. Like the bombings over Germany these kind of things just put people tighter together…
    And now they can say: See, we told you, they are after you (us)…. they hate Islam, they hate us, because of our oil, they hate us, because we don´t want to live their evil ways, they hate our !!! independency !!!….

    But the US government knows this.

    But, as I said, the governments want that. That´s how they´re going to “sterilize” all that “printed” money: in our pockets through the price of oil. That´s the mother of all “flat” taxes.

    Yea, globalization, that was a nice one…

    Actually, I think one should buy oil like bullion – relentlessly and all the time.
    Oil company stocks with dividends….

  2. Now I can justify that Harley I have had my eye on, 50mpg. The roads should be alot safer as well with nobody on them. I’ll get a rifle holder mounted on the side, just like Rat Patrol, but I will need to learn how to shoot left-handed so I can keep the throttle pegged.

  3. I am not going to say that $200 crude isn’t an inevitability. But this ongoing fear campaign that Iran is going to get weaponized nuclear abilities and then immediately start sending strikes to the likes of Isreal is borderline absurd. Assuming the Iranian leadership are the most radical, war-prone insane leaders on the planet. Are they utterly naive to not expect a full blown retaliation from both Isreal AND the US? I think the entire premise is fallacious. For 40 years, the USA & USSR were holding 98% of the tactical nuclear weapons on earth and not a single weapon was launched. Why? They knew the result. Are the Iranian leaders so clever to decide their own personal destruction with a first strike against… well, anyone? As Spock would opine, “It is illogical.” Do I believe their leaders are a little nuts? Sure. Are they crazy enough to call for the end of their existence? Not likely. Start to think why this propaganda is being proported; for whose benefit; and to what end. Have we passed the point of peak oil production – most assuredly. Are there people in power that wish to take over another country for the benefits of obtaining this eventually depleting necessity – oil? Seems more likely. Oil is essential to virtually every thing in our modern lives. Those power players that see this inevitability are looking to control that diminishing supply. $200 oil is going to happen, with or without the hype of Iran or whichever fanatic is threatening nuclear strikes. It is basic supply and demand.

  4. “And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.”

    Gosh, now there’s intelligence you can rely on. I wonder if it has dawned on these ninnies that Israel will hardly exist if at all if Iran retaliates. Here’s a clue…”Tehran’s successful launch of a satellite”…If these backward, dim, clueless, rag head camel thumpers can launch satellites …gee, I wonder if they can launch pointy rockets with really big conventional payloads with spot on accuracy? If I were an Israeli I’d move, but then I’ve said that before. It’s like talking to a wailing wall.

  5. “And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.”

    The only problem with all of the above is that the United States intelligence community confirms that Iran does not have a nuclear device and has not made the political decision to build one. -Phillip Giraldi

  6. I do not welcome or endorse military action against Iran. However, Americans need to realize that even at 6 dollars. A gallon gas would be cheap by western world standards. Cheap gas is nnot a birthright.

    On the bright side, I for one would welcome 10 dollar gas. It would keep the riff raff like Stuck and Colma off the streets and would make it easier for me to find parking for my SUVs. Maybe war wouldn’t be such a bad thing afterall. Every storm cloud has a silver lining I guess.

    1. llpoh

      Gas is $9 a gallon in Europe because they choose to add $6 in taxes to pay for their social welfare state. They also all drive tiny cars that get better mileage than my Insight. The major cities in Europe are walkable, have bike paths and excellent public transportation.

      Only about 50 cents of our cost is taxes.

      At $6 a gallon gas, this country would come unglued. The economy as it is configured could not function with $6 gas. Food prices would skyrocket. Grocery stores would be short on food. The GDP in this country would go to -5% within weeks.

  7. On the bright side, I for one would welcome 10 dollar gas. It would keep the riff raff like Stuck and Colma off the streets -llpoh

    Naw, Im pretty sure they still have ankles.

  8. Admin – you think I didn’t know that? They tax it for revenue and to kill demand. The killing demand bit has some logic to it. Plus there is the riff raff of the road issue.

    Whether or not 6 dollar a gallon gas will cause the country to come unglued – it is coming. If not today, then reasonably soon. Peak oil and all that.

    1. llpoh

      Could $6 gas actually benefit your business? Would it make your foreign competitors’ products more expensive due to transportation costs?

  9. Nope. High gas prices hurt my business. But no matter – in the end high gas prices are coming. We are woefully prepared. The euro nations are much better preppared in a lot of ways – transport, small cars, etc.

    I know it will hurt. But it is coming nonetheless. As you well know.

  10. Admin – You wouldn’t be trying to provoke me would you ? I know you have been bereft of quality opposition lately, but we are on the same side of this one methinks. But I will be more than happy to oblige when the time is right. Nothing like a good brawl to entertain the monkeys.

    1. llpoh

      No provoking from me.

      I was just wondering whether $6 gasoline could be the trigger to make local manufacturing more viable than shipping goods from Asia.

      1. I’m off to an Ale House to help get Ron Paul on the PA ballot and get a cheesesteak washed down by a few cold beers.

        Plus, this counts as our Valentine’s Day dinner.

        Ron essentially tied Romney in Maine today. 39% to 36%. Ron thinks he’ll win the most delegates.

  11. Seriously, though…. siphoning would be a scourge.

    Or worse, drilled tanks…

    Even more than the catalytic converter theft for platinum in ’07.

    The beginnings of Mad Max.

  12. Admin – sorry. But you do have a rep you know.

    I think to trigger mfg we would need 1) a collapse of the dollar 2) a collapse of wages to make costs more competitive 3) a reduction of wage overhead costs and 4) elimination of a great many govt regs and intervention. Mfg is simply not cost effective and the government is strangling us. High gas in and of itself is likely to be just one more higher cost. Sigh.

  13. In land area, the U.S. is 3 times the size of Europe.

    People, especially farmers, who live in the sparsely populated areas of the Midwest and West would be absolutely screwed if gas were $6 a gallon. Even if the state and federal government would eliminate all gas taxes on gasoline and diesel, that amounts to about 7 bucks and change on a 15-gallon fillup, from $90 to $83. Whoopee.

    Peak oil is death by a thousand cuts. $6 a gallon gas is getting hit by a .50 caliber sniper rifle.

  14. The euro nations are much better preppared in a lot of ways – transport, small cars, etc.


    Don’t you know that San Francisco’s the “most European” city around?


    Ahhhhhh…. the Smug is thick.


    Admin making his rounds…

  15. …get a cheesesteak washed down by a few cold beers. -Admin

    Shit, Jim, cold beer will only make the fat congeal.

    Drink some warm saki instead. =)

  16. Peak oil is death by a thousand cuts. $6 a gallon gas is getting hit by a .50 caliber sniper rifle. -SSS

    The new normal, mayhaps?

  17. Bill:

    You crave sake after our Boomer battle this week? That shit’s awesome… hot sake especially. Puts a smile on the face.

    I’m going for a steak tonight… a valentine’s feast as well. What vintage of sirrah shall I sup with it, llpoh?

    Nevermind. The rabble likes Jack and Anchor Steam, and the rifraf had better stick to it.

  18. SSS – I thought the .338 Lapua was the sniper round of choice. .50 cal seems like overkill. I am gonna have to add some serious armor to my SUV.

  19. Colma – cabernet merlot or cab straight up say five years old plus. Might have trouble finding it in your preferred 2 gallon jugs tho.

  20. Gas at $6/gal merely closes more gas stations. there will be isufficient customers to keep them profitable at that price. Already as noted on Zero Hedge gasoline deliveries to local stations is rapidly diminishing. Gas will simply become unavailable at the retail level at this price here in the FSofA. The Convenience Stores will not be able to sell enough of it to pay the bills.


  21. Here is what you do

    Go to Walmart and load the 1 ton pickup truck once a month.

    Oh, SNAP, do you think this is the day Walmart we are doomed pics are taken?

    Save Gas!

  22. Been riding a Harley for 35 years so i am ready for high dollar gas. But sorry Matt, 50 MPG just aint happening, try 35 to 40. But my trucking company does not like this expensive diesel. But then hey you the consumer are covering the fuel surcharge.

    Thank god Santorum does not have a chance in hell becoming the next moron in chief or I am quite sure we would continue or quest to conquer the world with first stop Iran. Hell were fucked anyway but I have my list made for the gun show tomorrow, get the rest of the parts I need to get my mossberg 590 zombie ready. By the Whitney Houston just died. Guess the nasty type drugs do kill. She should of just stuck to burning a fat one.

  23. IIpoh

    “I think to trigger mfg we would need 1) a collapse of the dollar 2) a collapse of wages to make costs more competitive 3) a reduction of wage overhead costs and 4) elimination of a great many govt regs and intervention. Mfg is simply not cost effective and the government is strangling us. High gas in and of itself is likely to be just one more higher cost. Sigh.”

    I may be wrong or just ignorant as I am on many things and I know nothing first hand about manufacturing so I have a

  24. IIpoh,
    Don’t know what happened. Crazy shit flashed on the screen, a blabbing ad started and killed the page. I think word press flashed a message and called me an asshole or something so I have to start over.

    Anyway I have a question that you should have more insight than most folks. I understand that Germany still has some strong manufacturing and those Germans are paid well and probably have all kinds of socialist free shit on the employers tab. How are they able to keep as much manufacturing as they do and still manage? Or are they really just doing the China thing too and just haven caught up the US companies doing their manufacturing overseas? Maybe you can shed a little light on this.

  25. I’m not llpoh but I can partially answer the Germany questions…

    1) Germany manufactures to a higher quality standard, consistently, than most other countries (Japan is in the same ballpark). This is perhaps least important though.

    2) Many of the things Germany makes don’t have many alternatives – high end precision machine tools are one good example. Good business which requires building for a long time. The US still has some of this but used to have more.

    3) Biggie #1: the Euro currency has given Germany a currency artificially cheap relative to the demand for its products (at the expense of most of the rest of the Eurozone) which is a huge boon to exports, both within and outside the Eurozone.

    4) Biggie #2: German companies tend to have a much longer term view than US companies and there is a great deal of “partnership” between business and government in creating and perpetuating necessary inputs and markets. US publicly traded companies tend to have a very short-term focus due to quarterly reporting and CEO compensation arrangements.

    5) Biggie #3: Labor relations are considerably better in Germany than in the US, due to a different outlook on both sides. In the US both unions and companies are often quite happy to kill the goose in order to get a golden egg 5 minutes sooner.

    6) Healthcare costs are significantly lower and not borne primarily by business.

  26. Bruce – much of what P says is right but …… Germany was on the same trajectory as the US re mfg until 1) crash of USSR which opened up captive markets. In East Euro. 2) East Germany was consolodated and needed to be retooled ) Europe is largely captive to Germany mfg and productivity and 4) perhaps most importantly German banks have finance the east European block etc in order to ppay for German goods. Now German banks are screwed as these countries go broke. It was a horrible symbiotic relationship that in the short term halted the decline of German mfg. Persnicks reasons are all part of it too.

  27. $6 gas will go a long way towards allowing the government to continue to coverup the productive destruction of this nation.

    Think of our GDP, the excise taxes, I know even with reduced usage, the first year after an immediate spike would leave Michigan swimming in the black and smiling from ear to ear. Won’t last, but nothing seems to matter past the next big election anyway.

    Closer and closer to the drain. The spiraling makes me dizzy.


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