On Tuesday afternoon in New York, after official trading in the energy futures market had closed but electronic trading platforms were still operating, the price of crude oil jumped $5 in seven minutes. The cause of this extraordinary event was a rumor that the US had attacked Iran.
The rumor was duly denied and prices subsided - to a mere $64-plus, where they traded throughout Wednesday. Meanwhile, the mainstream media - locally and around the world - continued to broadcast their daily drivel, about the Arab summit in Riyadh, the US presidential candidates' activities and pronouncements, and whether Haim Ramon's sentence would be quashed or whether Israel would manage to beat Estonia.
The economic media, especially in the US, continued to debate whether the sub-prime debt meltdown would drag the American economy into recession, or merely cause one million households to lose the homes they had deluded themselves into thinking they owned.
Nobody wants to be told that inflation is going to rise, their purchasing power to fall and they must reduce their standard of living. But that's what the action in the oil market over the last week strongly suggests. Set aside, for a moment, Tuesday's blip. The fact that prices have broken out of the broad range in which they had traded in recent months is, from a technical viewpoint, very bad news. Although the general public doesn't want or need to know about technical analysis, it can grasp numbers and it knows that 64 is more than 60, and a lot more than 55. In terms of what it pays at the pump, NIS 6 is a lot worse than NIS 5-and-a-bit, and $2.50 is worse than $2.20.
However, if it was just petrol prices, at least we could console ourselves that we've been there before and come through okay. Put it another way: if the latest rise in price was just because of insufficient refining capacity in the US and a consequent drop in gasoline inventories, that would be business as usual in the energy sector.
But the seven minute panic on Tuesday afternoon gave the game away: the markets are increasingly edgy about Iran - and with good reason.
Last Friday, the Iranians kidnapped 15 British sailors on the high seas. True, Her Majesty's government doesn't intend to do anything about this except huff-and-puff. If the British get really upset, they may table a resolution at the UN demanding the release of their servicepersons (that, presumably, is what Royal Navy personnel are called nowadays when mothers-of-three are on the front line). However, the markets understand that this carefully planned and timed event is not an "incident," but rather part of an ongoing pattern orchestrated from Teheran. Unlike Ehud Olmert in his famous "there comes a point… when a nation has to say 'enough is enough'" speech last year (that was when he had the entire nation behind him, not when 97% were against him), there is no chance of Tony Blair talking tough, let alone acting tough. But Bush might still act, while he has the capability - in the form of an unprecedented concentration of naval and air power now in the Gulf.
That's why a rumor that the Americans had attacked could start and be believed - it's not only theoretically possible, it could happen any day.
But the markets are not just jumpy about short-term developments. They are looking at where things are going over the medium-term: Iran is playing increasingly tough, while the West is increasingly wimpy. In terms of the price of oil, there are only two basic geo-political scenarios. If there is a confrontation with Iran, the price of oil will go straight through the roof. If, however, there is "accommodation" with Iran, involving "acceptance" of a nuclear Iran, then the Iranians and their proxies will steadily extend their spheres of control and influence - and the price of oil will rise in a more gradual manner, but relentlessly nevertheless.
A British analyst noted this week that "in another age, this (kidnapping incident) would have been considered an act of war." The Iranian government, however, considers itself at war with the UK, the US and the West as a whole (and, of course, Israel) since it seized power in 1979. Its actions are congruent with its beliefs, while the West's inaction is in line with its illusions. The markets, however, see Iran's actions and understand where they must lead. The rest of the West - politicians, pundits and general public - will work it out in the end, hopefully not too late.
