There are several factors that are contributing to the cost of oil right now.  You can read more of our writings about oil HERE.  Oil prices will continue their upward glide until the U.S. addresses both the issue of political instability with Iran but also how Wall Street is able to profit sizably off of that political instability.  Hint: They’re economically molesting you.

#1 – Political instability.  As America ramps up it’s covert and economic war against Iran, Iran is starting to claw back.  They’re even threatening to close off the Straight of Hormuz.  Now – obviously – America could prevent any closure of Hormuz; however – I do not know if they can open it without a full scale war.  And all of this instability is pushing the next reason for the rise in oil prices.

The one obvious factor, of course, is the political instability in the Middle East. Worries about Iran are probably the principal driver of these prices and the speculations surrounding it. Ironically president Obama’s foreign policy is having an impact economically that is not advantageous to him or the American economy.

Now, there isn’t an easy path to lowering oil prices. Drilling more or raising efficiency – none of this will have much impact in the short run. For now, as so often in the past, the geopolitics of the Middle east – America, Israel and Iran – are the crucial drivers of the fate of the American economy , and possibly the fate of this presidency.

Source: Fareed Zakaria

The main worry among traders is that Israel launches a unilateral surprise attack to try to destroy Iran’s nuclear facilities and that Iran retaliates by closing, even if only briefly, the oil flow through the Strait of Hormuz.

“It is the $200-a-barrel scenario”, says Philip Verleger, an independent consultant who correctly predicted in August 1990 the price rally after Iraq invaded Kuwait.

Source: Financial Times

#2 – Speculation.  ”The markets” see the political instability (#1) and this allows for an opportunity to buy oil while prices are “low” with the expectation to sell the oil as the middle man.  Wall Street’s speculation is essentially a tax.  But everyone should read the article below from the Economic Populist…it will make your blood boil just how much speculation is driving up the cost of oil.  It’s unbelievable…

A Goldman Sachs study last year stated that each million barrels of net speculative length in the markets adds as much as 8 to 10 cents to the price of a barrel of crude oil. As of February 23, 2012, the CFTC Commitment of Traders Report showed that “managed money” held net positions in NYMEX crude oil contracts equivalent to 233.9 million barrels. Using the Goldman Sachs research figure, and multiplying 10 cents times 233.9 million would mean that, theoretically, there’s a “speculative premium” of as much as $23.39 a barrel in the price of NYMEX crude oil.

Source: Economic Populist

#3 – As the American economy recovers (as well as the world) – the price of oil will continue to rise obviously.  The relationship between oil prices and economic recovery therefore almost have a “frenemy” relationship of sorts….economically speaking.

Here’s what the Wall Street Journal has to say:

Gasoline prices hit a nationwide average of $3.65 a gallon in the week through Feb. 20, government data show, close to the $4-a-gallon level that is widely considered the point at which oil prices become a political problem. The price is higher in some parts of the country, like California. While U.S. oil production has been rising in recent years, oil prices are set in a global market, which complicates efforts by U.S. politicians to come up with domestic solutions.

Source: Wall Street Journal

Of course – when we say “political instability” – we’re almost exclusively talking about Iran.  The Guardian put together an excellent article with great detailed information regarding exactly WHO buys Iran’s oil:

The top destination for Iran’s crude oil exports in the six months between January and June 2011 was China, totalling 22% of Iran’s crude oil exports. Japan and India also make up a big proportion, taking 14% and 13% respectively of the total exports of Iran. The European Union imports 18% of Iran’s total exports with Italy and Spain taking the largest amounts.

Sri Lanka and Turkey are the most dependent on Iran’s crude exports with it accounting for 100% and 51% of total crude imported, respectively. South Africa also takes 25% of its total crude from Iran.

Source: The Guardian

The Energy Bulletin has put together an excellent visual to demonstrate just where the oil is by increasing the size of a country on the map based off of known reserves.  Is it any wonder why America is so interested in the Middle East?

Source: Energy Bulletin

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