Is Israel this compromised?

What’s Behind the Crash in Crude Oil? This a major article dealing with the subject. It includes the following on Israel and Iran

London “Sunday Times” says Israel plans to attack Iran

[..] But speculation of a future war between Israel and Iran is baseless. That’s the majority opinion of Tel-Aviv traders and the crude oil markets these days. The Tel-Aviv-100 stock index rose to a record high of 945.5 last week, up 15% from a year earlier, close behind the MSCI Emerging market index which gained 19 percent. Israel’s economy expanded by a healthy 5% last year, losing 0.9% of growth due to $3.4 billion of damages from the summer war with Hizbollah.

The earliest clue of an impending war between Israel and Iran can be found in the Israeli shekel exchange rate. Yet the shekel gained 10% against the US dollar to a 5-½ year high in 2006. The Bank of Israel lowered its overnight loan rate by 100 basis points to 4.50%, or 75 basis points below the US fed funds rate, in order to rescue the dollar. Nearly $20 billion of foreign direct investment flowed into Israel last year, bolstering the shekel, led by a $4.5 billion investment from Warren Buffet.

Israel cannot play Russian roulette and attack Iran, because its nuclear facilities are inhabited by Russian technicians, and Israel imports 60% of its oil from Russia. Because Israel has limited fossil fuels, its energy supply from Russia is of extreme importance for the functioning of its economy. Therefore, Ahmadinejad holds the trump card, while his chief ally, Russian kingpin Vladimir Putin controls most of Israel’s oil supply, and can bring the Israeli economy to its knees.

Tehran is rewarding Moscow with a contract for LUKOIL, to give it a role in producing oil from Azadegan, one of the largest unexploited oil fields in the world. “LUKOIL has carried out some exploration at Azadegan and, according to a contract that will be signed in the future, Iran will allow the Russian party to participate in recovering oil in Azadegan directly,” said Russia’s Atomic Energy Agency chief, Sergei Kiriyenko.

“Russia sees no political obstacles to putting the Bushehr nuclear power plant into operation as scheduled. It is Russia’s position that Iran has the right to civilian nuclear energy, in compliance with non-proliferation regulations,” Kiriyenko said on Dec 12th. Russian Deputy Industry and Energy Minister Ivan Matyorov said Iran has also offered to cooperate with Russian oil and gas companies in exploring for new deposits, both on its own territory and in other countries.

“Iranians believe that Gazprom in particular is an effective world leader, and they would like to cooperate with it. Specifically, Iranian companies have extended their presence in Venezuela and Bolivia in this domain, and they would like to cooperate with Gazprom in these regions as well,” Matyorov said. He said Russian state-controlled oil company Rosneft could soon start developing deposits in Iran.

Ahmadinejad holds another trump card over Israel. Some 12% of China’s crude imports come from Iran. On Dec 20th, Iran and China’s CNOOC, CEO.N, 0883.HK signed a $16 billion deal to develop Iran’s northern Pars gas field and build plants to produce liquified natural gas. CNOOC would have a 50% share of the produced LNG. Sinopec 0386.HK, SHI.N, is negotiating with Tehran to develop the giant Yadavaran oil field and to buy 10 million tons of natural gas per year for 25 years.

Why is Iran cheating on its pledge to OPEC?

Iran is home to approximately 10% of the world’s oil and is the second largest exporter in OPEC, producing 3.8 million bpd. At the same time, Iran sits atop the world’s second-largest reserves of natural gas. Today, 85% of Iran’s export earnings, as well as half of its budget and a quarter of its economy is derived from energy exports. Despite oil exports of 2.5 million barrels a day however, Iran currently imports more than 40% of its annual consumption of gasoline from India, France, Turkey, and China, at an estimated cost of more than $3 billion annually.

Yet given a difficult investment environment and concerns over its nuclear program, Iran has been unable to upgrade its oil facilities, nor increase production capacity for the past few years. Oil production was stagnant last year, which resulted in the oil sector expanding by just 0.6% in real terms. Instead, Iran’s economy is being driven by higher government spending, which grew by 5.4% in real terms in 2006, the highest rate of growth in five years.

Strong government spending is eroding much of Iran’s oil revenue. While hydrocarbon revenue increased 28.3% last year, government expenditures grew a massive 39.6 percent. Tehran provides subsides for many staple items and housing, which total $25 billion a year. These subsidies are now costing the government roughly 15% of Iran’s GDP. Heavily subsidized gasoline is just 35 cents a gallon.

The latest plunge in crude oil, perhaps inspired by Saudi Arabia, is likely to put a squeeze on Iran’s budget surplus, which could turn into a deficit if oil prices fall towards $45 per barrel. To finance the government’s subsidies, Iran’s central bank increased the broad money supply by 36% in 2006, sending inflation soaring to 14.6% in September. Tehran cannot afford to cutback on oil production and reduce its oil income, without cutting back on subsidies and risk riots in the streets.

Iran’s all-out commitment to nuclear invincibility is also worrisome to its Sunni neighbors. Jordan, Egypt, Saudi Arabia and other Sunni-ruled Arab states now fear that US troops might withdraw hastily, leaving an Iraq dominated by Iranian-backed Shi’ite militias. That in turn could lead to the emergence of a Shi’ite Crescent linking Iran, Iraq, and Syria with Hezbollah in Lebanon and Hamas in Gaza.

While apparently ruling out the military option for 2007, the Europeans and the US are quietly engaging in economic warfare with Iran, by demanding that international banks and oil companies to pull out of dozens of Iranian projects, including development of Iran’s two massive new oil fields Azadegan and Yardavan that could expand Iran’s output by 800,000 bpd over the next four years.

US officials already have already warned that they will hold China accountable under Washington’s unilateral sanctions laws if Beijing proceeds with a $16-billion project to develop Iran’s North Pars gas field. Japan’s INPEX had secured the right to lead the $2 billion-plus development of Azadegan with a 75% stake, but pulled out of the deal in October under heavy US pressure.

In late 2005, Dutch bank ABN Amro agreed to pay $80 million in fines stemming in part from improper transactions with Iran through its subsidiary in Dubai, United Arab Emirates. UBS Bank and Credit Suisse of Switzerland recently announced they were suspending most new business with Iran, and British-based HSBC said it would no longer accept dollar transactions from within Iran.

The United States is expected to announce sanctions against Bank Sepah, a big Iranian commercial bank, under a presidential order aimed at freezing the assets of proliferators of weapons of mass destruction. Bank Sepah, established in 1925 is the oldest of the Iranian banks, and has a large network of branches in Iran as well as offices in Paris, Frankfurt and Rome.

Can economic warfare succeed in toppling Iran’s Ayatollah Khameini before he gets the bomb in 2009? If US military intervention against Iran has been ruled out for 2007, the big question is whether Saudi Arabia is behind the latest plunge in oil prices, to wreck havoc on Iran’s budget and economy? Meanwhile, Iran is banking on strong demand for crude oil from Asia to put upward pressure on the price, and there will be plenty of jawboning from Ahmadinejad.