The main-stream media was searching for clues to explain the worst wreckage on Wall Street in almost three years on January 19^th, with the Dow Jones Industrials falling 225 points, to 10,667, after failing to breach the psychological 11,000 for the second time in a year. The finger of blame was directed at bursting internet bubbles in Japan's Softbank, and Livedoor, and blow-ups for Google and Yahoo, while healthy earnings from Intel, General Electric, and Citicorp were not quite good enough.

But brewing just below the surface were comments made by US Vice-President Dick Cheney that rattled Wall Street, after returning from a three day trip to Egypt, Saudi Arabia, and Kuwait. "Whether or not there would be a spike in the price of oil if in fact there is some kind of a crisis with Iran is entirely possible," Cheney said in an interview with CNBC television on January 19 th. "But I think the consequences of that would be less significant than the consequences of having Iranian President Mahmoud Ahmadinejad armed with nuclear weapons," he said.

Shaken global stock markets are left wondering if Cheney's comments could be the first of a series of saber-rattling remarks, signaling that the Bush administration is moving towards a third phase in the war on terror, the Iranian-Syrian axis. Cheney is the chief architect of US foreign policy, and one can hear echoes of a speech he gave on August 26, 2002 in Nashville, Tennessee, just six months before the outbreak of war with Saddam Hussein's regime.

"Armed with an arsenal of these weapons of terror and seated on top of ten percent of the world's oil reserves, Saddam Hussein could then be expected to seek domination of the entire Middle East, take control of a great portion of the world's energy supplies, directly threaten America's friends throughout the region, and subject the United States or any other nation to nuclear blackmail," Cheney said.

Then two months after toppling Saddam Hussein, Cheney made the following remarks on May 31, 2003. "The battle of Iraq was a major victory in the war on terror but the war itself is far from over. We cannot allow ourselves to grow complacent, we cannot forget that the terrorists are still seeking weapons of mass destruction to use against us. With such an enemy, no peace treaty is possible, no policy of containment or deterrent will prove effective, the only way to deal with this threat is to destroy it completely and utterly, and President Bush is absolutely determined to do just that. If there is anyone in the world today who doubts the seriousness of the Bush doctrine, I would urge that person to consider the fate of the Taliban in Afghanistan and Saddam Hussein's regime," he said.

Last week, Cheney was responding to threats by Iranian President Ahmadinejad who insisted in an interview with the Khaleej Times on October 1, 2005, that Iran's nuclear program was peaceful, but warned, "If Iran's case is sent to the Security Council, we will respond by many ways, for example by holding back on oil sales," he told the Dubai-based newspaper. Iran exports about 2.6 million barrels daily, and is the second-largest producer in OPEC after Saudi Arabia.

"I'll do every thing in order to uphold our national interest. One of these things is that we will have access to the nuclear supply process," said Iran's Ahmadnejad. "Iran's nuclear fuel must be produced inside the country," said Iranian nuclear chief Gholamreza Aghazadeh on November 12^th, 2005, in Tehran after rejecting a compromise proposal by Igor Ivanov, Secretary of Russia's Security Council.

Iran controlled 125.8 billion barrels of proven oil reserves as of January 1, 2005, roughly 10% of the world's total, and an estimated 940 trillion cubic feet of proven natural gas reserves, the world's second largest and surpassed only by Russia. Crude oil exports account for about 80% of Iran's foreign currency income, and an oil official last month projected revenues from oil exports this year at $43 billion. US light crude oil has now built in a "War Premium" of $10 per barrel over the past four weeks, as traders factor in the possibility that Tehran could unleash the "Oil Weapon" or worse, a military confrontation in the Persian Gulf.

Iran raised the stakes in its confrontation with Europe and the US, on January 10^th, by removing UN seals on equipment that purifies uranium, which can be used for power, or if highly enriched, in nuclear bombs.

Wall Street pros are trained to follow the money, and were alarmed when Iran's central banker, Ebrahim Sheibani announced on January 20^th, that the supreme leader Ayatollah Khamenei had ordered the transfer of tens of billions of Euros to undisclosed locations, "We transfer foreign reserves to wherever we see as expedient. On this issue, we have started transferring. We are doing that," he said. Two days later, Union Bank of Switzerland said it is cutting ties with all of its clients in Iran and Syria because the business is unattractive.

Ratcheting up the pressure several notches was Israel's Defense minister Shaul Mofaz, who on January 20^th who said, "Israel will not accept Iran's nuclear armament. Ahmedinejad, and his hallucinatory statements, his criminal actions and his extreme views will bring disaster upon the Iranian people". Iran's Ahmedinejad has said repeatedly that Israel should be "wiped off the map" and has questioned whether the Nazi Holocaust took place.

Mofaz's words of words take extra significance, following remarks by IAEA chairman Muhammad El-Baradei on December 5^th, 2005, when he confirmed Israel's assessment that Iran is only a few months away from creating an atomic bomb. "If Teheran indeed resumes its uranium enrichment in other plants, as threatened, it will take it only several months to produce a bomb," El-Baradei told The Independent, according to Israeli Army Radio. "On the other hand," he warned, "any attempt to resolve the crisis by non-diplomatic means will open a Pandora's box."

Since the invasion of Iraq, the Bush administration has worked diligently to build-up the US Strategic Petroleum Reserves, now filled to capacity at 700 million barrels in the salt caverns of Louisiana and Texas, in the event of an Iranian oil embargo. Interestingly enough, US crude oil prices have more than doubled from two years ago, even though US commercial stockpiles of oil are 20% higher at 320 million barrels. Crude oil traders realize the build-up of reserves could deplete rapidly in a world where 70% of proven oil reserves are buried in the volatile Middle East.

"An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and the entire Middle East oil," said Iranian Expediency Council secretary Mohsen Rezai on March 3, 2005. About 40% of the world's crude oil shipments pass through the two-mile wide channel of the strategic Straits of Hormuz. Iranian forces are deployed at the head of the channel. Oman and the United Arab Emirates, holding 8.5% of the world's oil reserves are located on the other side.

Teheran could easily block the Straits of Hormuz and use its missiles to strike tankers and GCC oil facilities. Within weeks, the rest of the world would be starving for oil and the global economy could be in danger. Rezai, a former commander of the Islamic Revolutionary Guards, told the Fars News Agency that any Western attack on Iran would send oil prices rocketing to $100 per barrel.

When it comes to dictators in the Middle East, none are willing to give up their positions voluntarily. Regime change must come about by natural or un-natural death, or through a military upheaval. Saddam Hussein refused to accept a Russian offer of exile, even after witnessing a CNN televised demonstration of the MOAB, the Mother of All Bombs, with 18,100 pounds of explosives dropped by a C-130 aircraft on a Florida test site just days before the US-led invasion of Iraq.

Yasser Arafat, the former leader of the Palestinian Arabs, preferred the squalor of his bullet ridden Muquatah compound in Ramallah for two years, surrounded by the Israeli army, rather than accept Ariel Sharon's offer of exile to luxury in Paris, France, where he had an estimated $2.5 billion stashed away in French banks. Arafat finally relented to seek medical treatment in Paris, only days before his death.

Hafez al-Assad, the lion of Damascus, died suddenly in June 2000, but planned the hand over of his regime to his 39-year old son Bashar al-Assad, leaving the ruling Syrian Bathist party intact. Bashar Assad now faces international accusations of ordering last year's assassination of former Lebanese Premier Rafik Hariri, and has rejected demands by the UN to co-operate in an investigation of the murder. Iraq has also accused Assad of permitting thousands of al-Qaeda terrorists to cross the Syrian border to create unrest and mayhem.

Assad's defiant stance comes after a January 19^th meeting with Iranian President Mahmoud Ahmadinejad in Damascus, to consolidate their alliance made increasingly crucial as both countries face mounting US and European threats of international sanctions. Both Iran and Syria earn 80% to 90% of their foreign exchange revenue respectively, from exports of crude oil, and a UN sponsored embargo, if prolonged, could bring about widespread internal unrest, with both countries suffering from 20% plus unemployment rates.

Syria's Assad is in a more desperate state, with his existing oil fields pumping about 500,000 barrels per day, but expected to run dry in less than ten years, while the Syrian population is growing at around 2.3% per year. Damascus lost a major source of oil revenue in late March 2003, when the Bush administration shut down a pipeline from Kirkuk, Iraq pumping about 250,000 barrels of oil via a pipeline to the Syrian port of Banyas. Saddam Hussein had sold the oil to Syria for about $11 a barrel and the Assad regime exported the fuel at market prices and kept the difference.

Facing the threat of international sanctions and an embargo on Syrian oil exports, Assad bought the Chinese veto in the United Nations. In July 2004, China and Syria opened their first joint oil venture, the Sino-Syrian Kawkab Oil Company, to develop an old oil field in the northeast of Syria, nearly 600 km away from Damascus. In December 2005, western oil companies watched closely, as the Indian Oil & Natural Gas and the China National Petroleum Corp, collaborated on a successful joint bid for Petro-Canada's Syrian oil and natural gas assets, worth $578 million.

In a familiar gambit three years ago though, Saddam Hussein banked on a $3.7-billion deal signed in 1997 with Russia's LUKOIL to tap the huge West Qurna oilfield to buy him a Russian veto at the UN. China's largest oil firm China National Petroleum Corp had a deal with Baghdad to develop the Al-Ahdab oilfield, a $700 million project with output of 90,000 bpd. But Syria's economy could be toppled with a few surgical strikes at its oil pipeline and refinery infrastructure.

In the case of Iran's Ayatollah Khamenei and Ahmedinejad, both are determined to gain invincibility by acquiring a nuclear weapon, to terrorize Israel and rule over their neighboring Persian Gulf oil kingdoms, and might not back down from a military confrontation. Khamenei said on January 18th, "The Islamic Republic, based on its principles, without being scared of the fuss created, will continue on its path of scientific developments and the world cannot influence the Iranian nations' will."

The Ayatollah is convinced he holds the trump card at the United Nations with Chinese and Russian vetoes. Beijing has blocked Security Council efforts to sanction countries like Sudan, where China has a huge oil deal, and China imported about 300,000 barrels per day of Iranian crude in 2005, or 12% of its oil imports. Russia's LUKOIL holds a stake in the Anaran field in western Iran near the Iraqi border, and Moscow is a big weapons supplier to the Islamic regime. South Korea's POSCO Engineering & Construction won a $330 million order to build a steel plant in Iran.

Tehran has also bought influence in Tokyo. Japan's top oil producer, INPEX Corp.'s 1604.T, 36% has secured development rights in Iran's billion-dollar Azadegan field, estimated to hold the world's second-biggest single oil reserve at 26 billion barrels, is located near the Iraq border and 86% of the area has been cleared, and is one of the biggest foreign investments in Iran. Tokyo expects to pump 150,000 barrels per day (bpd) by mid-2008 from AZAdegan and reach 260,000 bpd by early 2012.

And China's oil demand is expected to grow about 14% by 2007 to hit 7.9 million bpd, versus US demand growth of about 3 percent. Other major buyers of Iranian crude oil include Japan, South Korea, Taiwan and Europe. If Iran halted oil exports of around 2.6 million bpd, the rest of the world's spare capacity would not be able to make up the shortfall, making $80 per barrel crude oil prices or higher possible in the short term.

How are the big-3 central bankers expected to react to a possible spike in oil prices to $80 per barrel or beyond? Incoming Fed chief Ben Bernanke has already tipped his hand, in a speech given on October 21, 2004. "If inflation expectations are low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices." In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock. Thus, Bernanke might point to the flat or inverted yield curve as credible proof that inflation expectations are firmly anchored on the low side, and start lowering the fed funds rate in reaction to an oil spike.

But while Fed chief Greenspan has been taking his foot gently off the monetary accelerator for the past eighteen months, European Central Bank chief Jean Claude Trichet has been driving monetary policy recklessly over the official speed limit, with Euro M3 money supply hovering 7.6% higher in November from a year ago, and above the bank's 4.5% target for non-inflationary growth. The ECB is partly responsible for the historic rise in global oil prices, by providing negative interest rates for hedge funds and commodity managers to leverage their purchases of oil.

Saudi Arabian oil minister Ali al Naimi warned the G-7 in a speech on April 21^st, 2005, "Despite our best efforts, Saudi Arabia and OPEC have had little ability to curb the rapid rise in prices. Oil is attracting vast sums of money from hedge funds and institutional investors seeking to maximize returns and diversify their portfolios." Naimi said that higher central bank interest rates would draw investors out of energy markets and into other asset classes. "As soon as these interest rates move they will probably go into better financial instruments such as bonds," he said.

The European Union accounts for 19% of global demand for oil, and yet the ECB and the Bank of England have refused to lift a finger to follow Naimi's advice. In regards to soaring oil prices, Trichet said on January 12^th, "We will continue to monitor very closely with respect to risks to price stability over the medium term. Everybody knows that we act when necessary. We have demonstrated that recently. That is well understood by observers and certainly by market participants," he said.

Despite the Trichet's endless brainwashing, what is well understood by oil traders is since the ECB cut its repo rate by a half-point to 2.00% in May 2003, the price of US Light crude oil in Euro terms has soared 137% to a record 57 Euros per barrel last week. Trichet is lingering far behind the inflation curve with his tiny quarter-point rate hike, and is still resisting a second hike due to heavy pressure by Euro zone finance ministers.

French Finance Minister Thierry Breton said on January 17^th, "My colleagues and I from the Euro group do not see the need to increase interest rates, but we will discuss this among ourselves and with the ECB in the framework of coming meetings. Inflation is well under control today in France and the Euro zone. It seems to me that monetary policy should remain accommodating," Breton said.

Higher ECB interest rates might not produce an extra barrel of oil, however, Bank of France chief Christian Noyer and Italian banker Lorenzo Bini Smaghi said the bank must do what is necessary to control inflation as oil prices surge. "We have to show we're very vigilant. Consumers concerned about rising energy costs may be tempted to think otherwise,' he said. Italian banker, Bini Smaghi said, "Oil is a concern, and if other prices hitch themselves to it, then we lose control of prices. We'll do everything necessary to maintain price stability,"

Bini Smaghi said higher energy prices are posing serious risks for both growth and inflation. "Nevertheless, the ECB needs to keep its focus on curbing excessive price gains. The ECB's priorities are those of maintaining price stability and keeping inflation low, notwithstanding all the risks,' he said. Despite the tough talk, the ECB might only hitch a ride to the Federal Reserve, and limit itself to a quarter-point rate hike, adjusting rates to a 200 basis point discount to the fed funds rate.

Germany's economy grew by an anemic 0.9% in 2005, yet the German DAX-30 index soared by 25% last year, helped along by booming foreign trade. Exports jumped by 6.2% in 2005, as sales to Russia and China climbed by nearly 25% each, and exports to the US grew by 9.8 percent. Still, the ECB insulated the European bourses, including the DAX-30 by flooding the banking system with cheap Euros and negative rates of interest. In turn, while inflating the DAX-30 to higher ground, the ECB also fueled higher global commodity prices, including crude oil and gold.

If the ECB is truly prepared to combat global commodity inflation by draining M3 liquidity and posting higher interest rates, then upward pressure on the Euro would emerge, and the spectacular DAX-30 rally could stall out and begin to plateau into a sideways pattern. However, a major military confrontation in the Persian Gulf, that carries oil prices above $80 per barrel, could sink the DAX-30 by 10% along with its counterparts in Japan and the US. That would limit the scope of future ECB rate hikes to a quarter-point to 2.50 percent.

It would have been inconceivable a few years ago to believe that Japan's Nikkei-225 could more than double from a 20-year low of 7500 in early 2003 to as high as 16,450 in January 2005, alongside a 140% increase in US light crude oil prices in yen terms. But the Bank of Japan's ultra-easy money policy floods the Tokyo money markets with an extra 32 trillion to 35 trillion yen ($300 billion) beyond the liquidity needs of local banks, and is fueling asset and commodity inflation worldwide.

The financial engineers at Japan's ministry of Finance are not expected to grant permission to the BOJ to start draining yen until the second half of 2006. Still, the Nikkei-225 could fall thru the BOJ's safety net if oil climbs above $80 per barrel. Pouring more yen on the flames would only send commodity prices higher yet.

In a strange twist of fate, the crude oil market has become the world's de-facto central banker, the only market mechanism that can impose some sense of discipline on abusive central bankers, who are otherwise unwilling to confront soaring commodity inflation. Higher oil prices lead to higher inflation, which in turn, has already persuaded a handful of central banks to lift their lending rates.

The Reuters Commodity index closed at new 25 year highs at the 345.15 mark on January 20^th, after hedge fund managers placed their bets on a continuation of the "Commodities Super-Cycle." Big-money investment funds have boosted their stake in commodities indexed markets to around $70 billion in 2005, up from $45 billion by the end of 2004 and only around $15 billion at the end of 2003, according to Goldman Sachs. Pension funds, as well as small, retail investors look to commodities as a crucial part of any investment portfolio. Commodities are expected to attract another $40 billion to $110 billion this year according to recent surveys.

As for the see-saw battle between the gold bugs and the Wall Street bulls, it is interesting to note that the Dow Jones Industrials fell to a seven year low, compared to the yellow metal. The Dow lost half of its value to gold from the September 11^th terror attacks until the conquest of Baghdad in March 2003, during the second phase in the war on terror. After gyrating in a tight sideways trading range between 24 and 26, for almost three years, the Dow to gold ratio began to break down again in November 2005, falling below the February 2002 low of 21.88.

So while the recovery of the Dow Industrials since the end of the Iraqi war in March 2003 looks very impressive on paper, in "hard money" terms, the US stock market remains in a long term bear market. The latest breakdown in the Dow to gold ratio coincided with Iran's rejection of Russia's compromise proposal for averting a confrontation, and thus, possibly signaling the beginning of Phase three in the war on terror. But this time, with the EU on board the American side.

And what could go wrong for the bullish outlook for crude oil in 2006? Well, global central bankers could step up to the plate and hike interest rates beyond a quarter-point in the first quarter to quell inflation expectations. But right now, that's a bet that only a contrarian with deep pockets is willing to make.

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