'Axis of Anxiety' boosts fuel prices

By Jon Markman

If you're wondering why the price of crude oil remains stubbornly high even as U.S. and European economic growth sputter, look no further than the president of Iran. The resurgent bad boy of the Middle East is aligning himself with anti-American leaders in Venezuela and Russia to create an Axis of Anxiety that has put energy traders on edge.

It's every American commuter's worst nightmare. After doing more than its part to push crude oil prices to a peak at $138 this month, the Axis of Anxiety will only be emboldened to seek higher prices in months to come. Venezuela, Iran and Russia together control at least 280 billion barrels of conventional oil reserves and many times more of unconventional oil and natural gas -- call it the Organization of Petroleum Exporting Countries' evil twin.

When you listen to Iranian President Mahmoud Ahmadinejad threaten to build and deploy a nuclear weapon to wipe Israel off the map, hear a Russian gas executive warn of $250 oil or witness Venezuelan strongman Hugo Chavez nationalize foreign oil companies, it makes you nostalgic for the good old days when OPEC was the world's energy villain. The 1973 oil embargo only pushed up crude oil prices to $12 a barrel, after all. Ahmadinejad wouldn't even clear his throat today for 12 bucks.

So what's next, and how can you make a buck off this unfortunate turn of world events? I explained Russia's role last August in this column and will explore Venezuela's role in a few weeks. But today let's take a closer look at Iran.

Spoiled by oil

Currently the most vocal element of the Axis of Anxiety, Iran is the second-largest producer of oil in OPEC after Saudi Arabia, and has been battling the United States virtually nonstop since the founding of the Islamic Republic in 1979. Although the 4 million barrels of oil it produces should have made the country rich, it has instead perversely made the country weak at its core. Spoiled by easy oil money, Iran has never fully developed its industrial base. Its oil production system is the laughingstock of the Middle East. Its banking system is a mess, and inflation is running over 20%. Meanwhile, a nasty drought has devastated food production, and the emergence of wheat disease Ug99 now threatens to wipe out even the crops that were getting water.

As a result, Iran needs oil to be priced as high as possible, no matter what effect it has on its customers. So Ahmadinejad and his mullah cronies thought up the crafty trick of threatening Israel with annihilation. Since this has provoked Israeli leaders to counter with threats to strike at Iran first, energy traders are understandably on red alert at all times. Oil is priced not just for today's value to current users, but also includes a premium that accounts for the possibility that supply might be severely kinked in the future. No one really knows what that premium is -- pick a number between $10 and $40 per barrel -- but Iran has essentially bullied its way to tens of billions of dollars in excess oil riches. Who says crime doesn't pay?

Fighting words

Not one to sit back and let someone else have all the fun, newly elected President Dmitry Medvedev of Russia a couple of weeks ago jumped into the fray with inflammatory rhetoric of his own, blaming the United States for all of the world's financial ills and claiming that it had "impoverished a majority of the people on the planet."

Russia, Iran and Venezuela want to pump up prices -- to the shock and dismay of the conservative Saudis -- because their kleptocratic, socialist systems have come to depend on increased flows of funds in much the same way an addict needs more and more money to get high. They're all sugar-daddy states in which the government provides big subsidies to keep restive citizens in line. Researchers believe that the Iranian government spends as much as $42 billion a year providing food, fuel and consumer goods to its people, or a whopping 7% of its $599 billion GDP. It also has had to pour money into its oil fields, but since it does so by command rather than through entrepreneurial efficiencies, researchers say its production systems are barely keeping up.

For a while, it was just Israel responding to Iran, but President Bush has also taken up the cause. Rumors swept Washington recently that the Defense Department had squelched a White House plan to bomb Iran last year. Now President Bush has hit the anti-Iran circuit again, telling reporters that he believes the country is "an incredibly negative influence" and "the biggest long-term threat to peace in the Middle East" against whom the United States is "pushing back hard." In a joint appearance with European leaders last weekend in Europe, Bush specifically warned Tehran to stop enriching uranium, while President Nicolas Sarkozy of France said it was "totally unacceptable" for Iran to have a nuclear weapon.

Continued: How real is the risk?

 1 | 2 | next >