By now you have heard that there was a rumor about a military something or other involving a rescue attempt for the captured British soldiers.Oil spiked to $68 for a few minutes and there was also a brief reaction in equity futures.
This map shows where it all happens. A lot of oil needs to go right past Iran and head on out to the rest of the world (a bit of a simplification on my part).
So we can see how easy it would be for Iran to gum up the works. Clearly any threat of any sort around this area will dislocate markets to some degree.
This is a very complex situation but in case you have never really taken a good look at the region it is easy to see that if Iran ever did something nutty it would create a lot of hurt for a lot of people.
The probability you assign to Iran kicking things up a notch would determine how much of your portfolio you allocate in expectation of this. Things like oil, gold, defense stocks and the Swiss franc all seem like candidates to protect against this outcome, an outcome that I think has a low probability.
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http://www.marketwatch.com/news/story/these-ultra-rich-investors-moving-away/story.aspx?guid=%7BF00F3A4C%2DA703%2D4E78
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Seems consistent with what we read wrought here.
Prediction: Anna Nicole will still be the lead story next week, which means nothing. Dark comedy. FWIW during the iran hostage crisis I had much contact with iranian academics. It's true there are wonderful people in Iran, more westernized than the news reveals. But the religious fanatics are in charge. Persia never died and they want to remind others. I wonder if all of this is timed with Passover.
Iran would not be rational if it cuts off world oil, considering Israil & US will not pass such a good opportunity to get rid of Iran's nuclear or millitary establishment. Similarly, it does not seem rational anyone what to attack Iran to provoke such a scenario either.
We should give Iran a little credit in that their leaders are not that crazy. It is not the first time Iran captured some soilders. The difference is that many hedge funds can't wait to make a few bucks now.
which is why I assign low probability to this outcome.
which of the geopolitical events in that area over the last 30 years qualify as "rational" from your point of view?
rational thinking did not stop the attacks on egypt in 56, the six day war in 67, the war of 73, the "civil war" in Jordan in 1970, the civil war in Lebanon starting in 75, the invasion of Lebanon by Syria, the invasion of Lebanon by Israel, the Iran-Iran war, the invasion of Kuwait by Iraq, the first gulf war, the Israel attack on Iraq's nuclear reactor in 85, the second gulf war, the Hezbollah attacks on Israel, the Israeli attacks on Lebanon...
rational thinking is not a good basis for assigning probabilities to future events in the middle-east.
fair enough but i tink starting out from a point of reason fits for me you need to do what fits for you.
Iran isn't being irrational given the way western diplomats conduct foriegn policy (primarily those from European countries, but there are plenty of like minds in our own State Department).
On the surface it doesn't make any sense to take hostages just after you have sanctions imposed on your country...unless you somehow believe it gives you a bargaining chip. Iran is simply taking a page from the North Korean playbook.
I guarantee Iran will be rewarded for taking hostages. Just wait and see.
The vast majority of supplies to the troops in Iraq also go (via contract shipping) through that same bottle neck.
There are a lot of ugly scenarios. Many of them are not "like", but I think both sami's and tom k's points are more on the mark then trying to predict events based on rationality.
After all there is far from universal agreement that our invasion of Iraq was the "rational" follow to our war on terror.
I'm not sure Iran "cutting off" world oil is the only scenario that reduces overall oil supply coming from this part of the world.
E.g. Bush and Blair today talking about the possibility of an embargo of Iranian shipping. I understand that would take out 2.5 million bbl of oil per day, the entirety of spare capacity in oil channels today.
Meanwhile, today there seemed to be divergence between the price of oil (rising) and oil/drillers/services stocks (flat or down). Where's the sector leadership in this "rally"?
Thanks for the nice post!
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