What Iran Is On About

Analysts who talk about "getting tough" with Iran completely miss the point. (Chart from WRTG Economics.)

Such talk plays right into Iran’s hands. It’s what Iran wants. It’s what Ahmadinejad desperately needs right now.

The reason for that is seen in the chart at the right. Oil prices were at $50 when the year started, rose over $60, and were falling back when the British sailors were seized. 

Iran currently exports about 2.5 million barrels of oil per day, mainly to Japan and Europe. In just the last week, the country has brought in an extra $17.5 million, just on the price spike. If you consider where prices were heading (south) before this incident, you’re looking at $15/barrel Iran can say it’s earning from the tension. Multiply that by 2.5 million, and it’s $37.5 million per day that Iran earns from holding the hostages. Start talking up war and the value goes up.

Meanwhile, Iranian production is falling. Within a very few years, The Wall Street Journal estimates, Iran will no longer be an oil exporter.

So how do we play it?

1. 
   Get the G8 together on a floor price for oil, $50/barrel. This would cover all of the major industrial powers, absent China. And the price would be lower than the current market price, so China would have an incentive to join the regime. The purpose of the floor would be to stimulate the development of renewables, assuring solar, geothermal, wind and hydrogen producers of a market.
2. Use Dubai. Have Dubai diplomats get between Iran and Great Britain. The upshot would be an agreement to expand Iranian production, through a good Dubai company named Halliburton.

The result of all this is that the leverage Iran has on the oil market is permanently reduced. In exchange for a steadier income stream, and a rising one as production rises, you get something like a permanent peace.

More important, you create a new economic system, in which entrepreneurs worldwide have a guaranteed incentive to product alternative energy sources. They know they will have a market if they can keep their costs below $50/barrel equivalent. So investment will naturally move there.

This is what wise leadership would seek to do.

Too bad we don’t have any.