As Chinese president advises navy to prepare for war and Iran readies its missiles, is $250/barrel crude oil near?

By Deepak Rangan
Iran's foreign minister had earlier warned of a $250/bbl Crude Oil in the event of attempting to harm the country. With China preparing for military combat and Iran readying its missiles, $250/bbl does not seem like a distant possibility.

THE SMELL OF WAR

-Yahoo news reported Chinese President Hu Jintao as saying that the Chinese Navy should "make extended preparations for warfare” and urged his navy to prepare for military combat. This follows statements by China's Major General Zhang Zhaozhong who said that China will not hesitate to protect Iran even with a Third World War in order to safeguard its domestic political needs.

-The Telegraph meanwhile has reported that Gen Mohammed Ali Jaafari, the commander of Iran’s Revolutionary Guards has raised the operational readiness of status of country's forces, initiating preparations for potential strikes and covert operations while also initiating plans to disperse long-range missiles, high explosives, artillery and guards units to key defensive positions

CRUDE OIL AIMS FOR THE SKY

-Iran is the third largest exporter of crude oil in the world. Much bigger than Libya. Problems in Libya had pushed prices to $110 and even though it declined, later on, oil is still at $100/bbl because of the tight physical market. So obviously the loss of oil from a much larger oil exporter like Iran could easily push up prices to scary levels.

-However, the most important reason prices could spike to $250/bbl and even above is the fact that Iran nearly controls the Strait of Homruz through which almost 18% of the world's daily oil flows from the Middle East. It is the single most important oil waterway in the world. Conflict in the area will result in a loss of millions of barrels of oil which will definitely propel prices to unseen levels.

CRACKS IN THE ECONOMY

Even at current prices, $100 oil is terribly expensive. Imagine the case of a $250/bbl scenario! That's a 150% rise in fuel prices alone together with rising cost of food, consumables and every form of products that requires transportation. And this will happen at a time when personal income will remain stable/unchanged!

In a world where economies are contracting,growth is slowing, unemployment is increasing, public dissent is rising and governments are becoming nearly bankrupt and insolvent, a $250/bbl oil is the last thing the world needs. Combined with the trillions of war dollars (possibly funded by even more debt) that will be spent, a war will easily set back the economy by decades!