My gut feeling on oil prices has shifted to thinking they are more likely to rise than fall in coming months. The factors going into that thinking are:
- The ECB LTROs seem to suggest a willingness and ability on the part of the ECB to prevent failure of major financial institutions. That in turn suggests a "Japan-style" resolution for the European imbalances - a long period of stagnation and zombie banks slowly working their way out of trouble rather than a "great depression" style resolution with a cascading series of institutional failures. That in turn suggests continued gradual recession in the European economy, rather than abrupt contraction. Thus the continued loss in European oil demand would be gradual.
- Rather strong US economic numbers in recent months seem like more than just a failure of seasonal adjustment post-great-recession and suggest that the US really is recovering at a slightly better pace. Auto sales are recovering well, and all this is bullish for US oil demand.
- The Saudis have suggested that $100 is a fair price for oil. Brent is not far above that now (and Saudi grades generally trade at a discount to that). This suggests there is not much room for oil prices to fall further without triggering a reduction in Saudi production. In turn, I doubt the Saudis have much capacity to expand production.
- The situation between Iran and the rest of the world continues to deteriorate.
Israelis like to say that when it comes to military and security operations, those who know don’t talk, and those who talk don’t know. But the intense and increasingly public debate about whether to attack Iran’s nuclear facilities is challenging that piece of conventional wisdom.This kind of thing is extremely difficult to evaluate - it comes down to the ability of individual reporters to correctly discern the true beliefs and intentions of sources who are explicitly trying to manipulate the press ("No, no, this time we really mean it!"). Anyone who's been following politics for any length of time is aware that scares about some combination of Israel and the US attacking Iran show up in the press every year or so, and so far none of them have come to anything. Seymour Hersh has been issuing regular alarm calls since at least 2005.
The standard view has been that successful attacks rely on secrecy and surprise, so the more talk there is about an operation, the less likely it will occur.
One year ago, Prime Minister Benjamin Netanyahu seemed to support that theory. He told foreign journalists that Iran briefly stopped working on a nuclear weapon only once, in 2003, because that was when the United States attacked Iraq, and Iran feared it might be next.
“The paradox,” Mr. Netanyahu said then, “is that if there is a credible military option, you won’t have to use it.”
In other words, the more noise you make about war, the less likely you will have to resort to it.
But few who have spent time with Israel’s decision makers in recent months have come away believing that the talk of a military assault is merely a well-scripted act of public diplomacy. It is that, to be sure, but there is more. It is also a window into the government’s thinking.
Still, the more I've thought about it, the more intractable this situation seems to me. If I was an Iranian leader, I'd be looking at the fate of the regimes in Iraq and Libya and now Syria and thinking the only thing that would prevent outsiders trying to do the same thing to me would be nuclear weapons. I'd also be aware that I'd recently had to steal an election and then viciously suppress the protests in the aftermath, and I'd be well aware that there was plenty of internal dissent that the outside powers could work with. And I'd also be very well aware that foreign powers were assassinating my scientists and blowing up my missile plants. So I'd be doing everything humanly possible to advance my nuclear weapons plans as fast and as secretly as I could to get myself into the situation where nobody could mess with me or threaten me any more.
And correspondingly, if I was an Israeli leader, I'd be looking at Iran arming Hezbollah on my northern border and doing everything they could to arm Hamas on my southern border, and periodically making extremely intemperate statements questioning the very existence of my nation, and I'd be thinking that it would be extremely dangerous to let these people have nuclear missiles and that it would be worth a very high level of risk to try to prevent that. And that would be my number one policy priority and I'd be doing everything I could to bring about the conditions in which I could remove that threat with the minimum backlash.
Thinking along these lines suggests to me that it's more a matter of "when" not "if" the thing spirals out of control. The Obama administration will have no interest in sparking a giant oil shock in an election year, and has been communicating that forcefully to the Israelis. However, it's far from clear that the Israelis will share that motivation. Why not put the US President in the position where he has to either back them up (eg by suppressing Iranian retaliation in the Gulf of Hormuz) or look weak and feckless in dealing with the hated Iranians, something the Republican candidate will be happy to campaign on all year? All that's needed is to first go through the motions of giving all possible sanctions time to fail so they don't look too crazy to world opinion.
This is highly speculative of course. It's entirely possible the Israelis are bluffing at present and will wait longer. I guess I just think there's a way in which everyone's plausible deniability is eroding. The last IAEA report removed pretty much any residual doubt about the Iranians' good faith and honest dealing on matters nuclear. And the series of explosions and assassinations in Iran has been getting longer and more blatant. At some point, the pretense that this is not a war becomes unsustainable, and once people stop feeling the need to pretend, things could worsen quickly.
At least, that's my gut feel. I could, of course, be completely wrong. In particular, it's still clear that Europe has no credible solution to the plight of Greece, Portugal, etc, and that's likely to lead to various explosions as the disorderly adjustment process continues.