Facing the prospect of economic sanctions by the United Nations and potential violent force from Western countries, Iran the other day essentially told the U.N. to take a hike as it plans to move forward with its uranium-enrichment program.
Some would say this is a bold move by Tehran, but considering we're talking about a showdown with the jellyfish United Nations, it’s hardly a show of strength. If anything, it sends a message to the world that Iran could care less about potential economic sanctions because it's making obscene amounts of money from higher crude oil prices.
Oil is the ultimate weapon
As the fourth largest exporter of oil in the world, Iran knows that its ultimate weapon isn't a nuclear bomb but rather a barrel of oil. If Iran cuts off supplies to the world - even a small percentage of production - it would be catastrophic to the global economy.
Today, the world requires 84 million barrels of oil a day to survive and oil producing countries are only pumping 85 million barrels a day out of the earth. Any slowdown to this production (i.e., hurricane, war, etc.) would immediately cause a spike in oil prices and a collapse of all stock markets around the world.
You can see this reaction in the United States. With talk about Hurricane Ernesto heading to the Gulf of Mexico, US oil prices spiked and the stock indices dropped. Fortunately, the storm shifted to the east, thus maintaining oil production in the region and causing oil prices to settle down - and, more importantly, lift stock markets higher. (Consequently, the S&P 500 hit a three-month high in the days after oil fell below the $70 a barrel level.)
"What to do" meeting on September 7th
Now, the concern regarding oil has shifted to Iran and it's up to the world's leaders to solve the riddles of this defiant country. A meeting has been scheduled for September 7th to figure out "what to do." I wish them luck because if this situation isn't resolved diplomatically soon, investors are going to have some serious problems with share portfolios as we close out 2006.
Investments will take a hit
Here's why: After seeing higher oil and gas prices this summer, consumer spending dropped. This is because people have less discretionary income due to the fact that it's costing a lot of cash to fill up their cars.
Look at the US, for example. The drop in gas prices certainly helped with consumer spending as the US Government just this week said spending increased by 0.8% in July. This uptick in consumer's opening their wallets is partially attributed to the slight drop in petrol prices. As a result, stores like Wal-Mart reported higher retail sales for this period. Starbucks even reported that August same-store sales were up 5%.
$100 a barrel – what this could mean
Now, let's consider if Iran shuts off the spigot for exporting oil and tells the world - especially the United States - to go find the commodity somewhere else. Well, we'll definitely see prices for crude come close to the elusive $100 price and have petrol prices shoot higher at the pumps and heating fuel prices, too.
This effect on discretionary spending could again feed through to the economy and the stock markets as retailers, for one, will be hit hard and cause a negative ripple effect on consumer staples.
Prices for crude at $100; petrol hitting new highs at the pump; potential for more violent conflicts in the Middle East - these are the ingredients for horrible market conditions and dire results for your portfolio.
Investors looking for some profit seeking moves to take advantage of higher oil prices and off-shore drilling, consider some of the blue-chip oil companies for your portfolio.
Warm regards,
Frank Hemsley
Profit Watch
