Oil and saber-rattling

James Surowiecki in the New Yorker provides a compelling explanation of Iranian President Mahmoud Ahmadinejad's saber-rattling:

This latest confrontation with the U.S. should have been the capper to a bad winter for Ahmadinejad. Strangely, though, it may instead have brought about an upturn in his fortunes. Soon, oil prices started to rise, jumping twenty per cent in just two weeks. As a result, the Iranian regime suddenly has an extra twenty million dollars or so to spend every day, a windfall that will help Ahmadinejad to placate his critics and solve some of his country’s more pressing economic problems.

The jump in oil prices wasn’t entirely a geopolitical phenomenon—the cold snap in the U.S. was also a big factor—but it was driven in part by an increase in what oil traders call the “risk premium.” When buying and selling oil, traders don’t just look at today’s supply and demand. They also try to forecast the future. And if buyers think there’s a chance that supply is going to be lower down the line—because, say, Iranian oil fields will be shut down—they will be willing to pay a higher price today in order to guarantee that they will have the oil they need. That’s why, in the run-up to the Iraq war, oil prices jumped more than fifty per cent. In the current confrontation between the U.S. and Iran, these same concerns create a perverse set of incentives: whenever the U.S. says things that make a military conflict with Iran seem more likely, the price of oil rises, strengthening Iran’s regime rather than weakening it. The more we talk about curbing Iranian power, the more difficult it gets.

And though Surowiecki doesn't mention it, a similar set of perverse incentives applies to the Bush-Cheney administration because of its cozy relationship with Big Oil.

It may sound somewhat paranoid, and I'm not claiming that it's the primary motivation behind administration saber-rattling, but think about it: if anti-Iranian rhetoric and propaganda were hurting the profits of Exxon-Mobil, we wouldn't be hearing much of it.

(Via Economist's View.)