Volatile Period For Markets as Iran Tensions Increase


In November of 1979, radical Iraninan students stormed the U.S. embassy compound in Tehran and held nearly 70 Americans hostage for the next 444 days. It did not end quickly. What was the goal? Well, it certainly cost Jimmy Carter the 1980 presidential election. Carter was humiliated and portrayed as ineffecutual and powerless to the American public. Iran eventually released the hostages, about four minutes after Ronald Reagan was innagurated as the next American president.

The Iranian regime doesn’t have an election to inflence in Britain. 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 th next British Prime Minister every reason to quickly withdraw British forces from Iraq.

But intelligence analysis is not our beat here. 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, this points out what is different this time from 1979. Ivestments 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.

It may be about to boil, probalby in the region of US$100. 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? 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 ecnomic interets (although oil exporters surely appreciate the huge profits from these spikes). But what is more likely to happen is that enregy prices creep back up to their levels from May last year and decouple from the rest of the market.

Eventually, high global energy prices slow global growth, leading, at least in theory, to lower energy prices. This another way of saying the best cure for high prices his higher prices. Either way, the next month is traditionally a volatile period for markets. It’s certainly shaping up that way.

“Superannuation savings have exceeded $1 trillion for the first time,” reports today’s Age. “The Australian Prudential Regulation Authority says employers contributed $11.3 billion towards superannuation and employees $6.4 billion in the three months to December 31.” That’s a lot of money, Australia. Let’s hope it finds a safe home to grow, where it can be counted in for when retirment rolls around.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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