Want to Put Iran Out of Business? Here's How   (January 5, 2012)

If you want bloodless regime change in Iran, then do one thing: drop the price of oil to $25/barrel. Yes, it's entirely possible.

Those attempting to pressure Iran by increasing "tensions" and thus the price of oil have it precisely backwards. The one sure way to fatally destabilize the Iranian theocracy is to adjust the demand and supply of oil so the price plummets (as it did in December 2008) to $25/barrel, and stays there for at least six months.

It has been estimated that the Iranian theocracy cannot fund its bloated bureaucracies, military and its welfare state if oil falls below around $40-$45/barrel. Drop oil to $25/barrel and keep it there, and the Iranian regime will implode, along with the Chavez regime in Venezuela.

Saber-rattling actually aids the Iranian regime by artificially injecting a "disruptive war" premium into the price of oil: they can make the same profits from fewer barrels of oil.

The way to put them out of business is drop the price of oil and restrict their sales by whatever means are available. They will be selling fewer barrels and getting less than production costs for those barrels. With no income, the regime will face the wrath of a people who have become dependent on the State for their sustenance and subsidized fuel.

How do you drop oil to $25/barrel? Easy: stop saber-rattling in the mideast and engineer a massive global recession with a side order of low-level trade war. Though you wouldn't know it from the high price of oil, the world is awash in oil; storage facilities are full, and production has actually increased a bit in North America.

Long-term, Peak Oil is a reality; but in the short-term, production is more than adequate to meet recession-suppressed demand.

The way to drop oil from $100/barrel to $25/barrel is to crush demand via global depression. Let's face it, the global economy is already slipping into depression as credit bubbles pop and austerity and rising debt service expenses bleed off disposable income.

We can nudge the global demand for oil off a cliff with a few other policies, for example, a low-grade trade war with China and Japan. Political leaders everywhere are already itching for a scapegoat, and imports are ready-made and waiting. Slap some heavy tariffs on Chinese and Japanese goods for "dumping" or some other excuse and then the inevitable counter-tariffs will be imposed on U.S. imports. Since U.S. exports to Asia are but a thin slice of imports from those nations, even a low-key trade war will have outsized negative consequences on Asian exporters.

Exports make up a relatively small percentage of Japan's GDP (ditto for the U.S.), but they contribute most of the marginal growth and profits in the Japanese economy. China is hugely dependent on exports and fixed investment in factories and real estate. There is no way the Central Government can spend its way out of the hole created in the Chinese economy as the real estate bubble pops, exports plummet and foreign direct investment dries up.

Europe is already caught in a vice of austerity and rising debt service expenses, so a depression there is already in the pipeline.

In the U.S., a $1 per gallon tax on all liquid fuels would cause short-term pain but would put significant downward pressure on oil consumption. Even without this tax, U.S. consumption will crater as the global economy contracts and Federal spending finally stops rising.

The most important fact about the global pricing of oil is that price is set on the margin. That means that if global demand falls by 10% from 80 million barrels a day (BPD) to 72 million BPD, price will not drop by 10%--it will fall far more.

It is instructive to recall that the mere threat of global depression in late 2008 sent the price of oil under $30/barrel in very short order.

Supply needs to overwhelm demand for at least six months to put the Iranian theocracy out of business. For that, the U.S. needs its exporting allies such as Canada, Mexico and Saudi Arabia to continue pumping even as prices collapse.

As I have often noted in my "head-fake" series on oil pricing, rapidly plummeting prices set up a positive feedback loop which further suppresses price: as regimes like Iran find their income from oil exports falling below their minimum survival level, the only way they can raise cash is by pumping more. This extra oil hitting a market awash in oil will only further suppress price.

Alternatively, they can withdraw their oil from the market in the hope that this reduction in supply will cause prices to rise. Unfortunately for Iran and Venezuela, their production isn't large enough to overcome a 10% reduction in global demand. Six months into their forced-austerity program created by their net income from oil exports falling to zero, they will find the streets filled with hungry, angry citizens.

That will be the end of those regimes.

So the first part of the solution to Iranian hegemony is to actively pursue high-visibility diplomacy in the mideast, repeatedly declare "war is not the answer," etc., and announce some major diplomatic initiatives, even if they are totally for show. That will drop the price of oil $20/barrel in short order.

Then quietly gain the support of the major exporters to continue pumping even as oil prices collapse. The Saudis and other major exporters can survive six months of low income from oil; the Iranians and the Chavez regime cannot.

Lastly, impose austerity, write down debt, squeeze lending, initiate some low-key trade wars and cut Central State spending, all of which will trigger a severe contraction in the global economy and in demand for oil.

Then once the Iranian nuclear threat has been throttled by a collapse in that regime's income stream and by a populist regime change, pro-growth policies can be restarted--and perhaps this time, if debt has been written off en masse and the predatory financial sector is finally allowed to implode in insolvency, they will actually be effective.

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