Oil, an alternative theory on Iran

 I've been talking to a lot of friends about the up coming war with Iran and how to play it. Most folks seem to agree that oil is the way to win. Go long oil and wait for the bombs to drop, the straight to close, speculators to run amok, and the military machine to start gulping down fuel. This is a possible play and it seems to make good sense, but I hesitate to buy into anything EVERYONE is already sure of. Somehow running with the herd never works out for me. With that in mind I've been looking for an alternative scenario.

 First thing we need to ask ourselves is why would oil prices go up? Iran's oil isn't getting to the US or Europe right now, so we won't be affected by that. Why would we stop buying Iranian oil in advance of a war with Iran? Seems like it might have been to give our industries (mostly Europe's) time to ween themselves from it. Assuming Iranian oil isn't reaching western shores today but is still getting to someone we can also assume it would have limited impact on the price of oil. Unless we destroy the oil fields, which I doubt we would. I also doubt the Chinese would stand for it.

 Who would Iran export oil to if they were being bombed? Well China of course. But the Chinese are pretty slick and aren't going to pay full value if they don't have to. They certainly aren't going to send their tankers to a war zone right? Hell, they aren't even sending enough tankers to Iran today. The question is, why not?

 Iran bargains:
 I'd speculate they know the Iranians are in a tough spot and want to bargain themselves a little discount. I would think 20% should be enough to get those tankers out of other ports and into Iranian ports. Even if there isn't an attack on Iran, more likely really, the Chinese bargaining for a better deal with Iran would lower the price of oil globally. This would also accomplish another of China's goals, hitting the dollar in the balls.

 If the price of oil dropped over night most of the nations in the world would be a lot better off. The US and Canada however would not. If oil took a dive as such the dollar would also take a beating. The need for US dollars around the world would decline in tandem. This would have a major ripple effect of course, from increased food prices to giving us very little of those oil savings. Lower value dollar means less oil per dollar. The world gets a 5% fuel price reduction, the US gets maybe, MAYBE, a .5% reduction.

 The other effect would be the US government would no longer be able to issue TBills for a real negative return as we have been. That 1 trillion a year we borrow at almost no cost, POOF! Dried up.

 If the Iranians can manage to make such a deal with China it's very unlikely the Chinese would allow the US to bomb Iran. If we were getting a 20% discount over spot I'm pretty sure we'd protect that deal with gusto. If this happens it puts a real kink in US plans and hurts the dollar in a serious way. It would also wipe out a lot of the speculators.

 All it requires is China and Iran to agree to an oil discount. Easy to see the Chinese accepting it, but what about the Persians? I don't know if this kind of thing is in the works or if I'm the only person to have thought of it so far. But it does present some interesting possibilities.

 Follow Up posted here.