Watch Oil Prices as Iran Rattles Economic Sabres

Terry Keenan, New York Post:

One of the stated goals of al Qaeda and America's other avowed Arab enemies has always been to rattle our USD10 trillion dollar economy. So far, bin Laden has had only minor success in this area, but this week we got an inkling of how Iran is plotting to use its oil weapon to maximum effect.

If history is any guide, the 13 percent run-up in crude oil prices so far in the new year is a rational — if not muted — reaction to just how potent that weapon could be. That's because any disruption in Iranian oil supplies would have significant economic consequences both here and abroad.

Unfortunately, Iranian president Mahmoud Ahmadinejad knows this. He also knows that unlike past years, Iran now exports more oil than the world's current spare capacity.

In other words, when it comes to the oil weapon, Iran has more leverage than ever. READ MORE

As tensions escalated this week in this high-stakes game of chicken, even Tradesports, the Internet exchange that lets users bet on elections and other geo-political events, was seeing heavy trading in "futures" that gauge the possibility of a U.S. or Israeli military strike on Iran.

As the Dow tumbled Friday, the value of these so-called futures soared — now factoring in a better-than-40 percent probability of military action in the next year.

Yet, even ruling out that extreme scenario, it appears oil prices are poised for a wild ride higher in the months to come. Although production and consumption patterns have changed since the oil embargoes of the 1970s, the oil shocks of that era still offer the best preview of what could lie in store if tensions continue to escalate.

So how high could prices go? The 1973-'74 oil shock caused prices to nearly quadruple, while the 1979 shock saw a doubling in prices.

According to the Web site The Oil Drum, if Iran was to cut off all production, oil prices could "roughly double from their current level." If Iran should merely reduce its oil exports in retaliation for sanctions, the price impact would be less severe but could still result in $80- to $90-a-barrel oil.

And watch for Iran to try using other economic weapons at its disposal to try to attack the U.S. economy. On Friday, Tehran set off alarm bells by admitting it has started moving its foreign exchange reserves out of Europe in hopes of shielding the country from the threat of sanctions and avoid a repeat of 1979 when billions of Iranian assets were frozen in the wake of the coup.

Of course, the Iranians may back down, and so too may oil prices.

But those who follow the markets see storm clouds gathering. It's one of the warmest Januarys on record here in the Northeast, yet oil prices are near record highs.

The market clearly senses something is amiss. Let's hope this time Mr. Market is wrong.

TERRY KEENAN is anchor of Cashin' In, an investing program that appears on Fox News Channel on Saturday mornings at 11:30. E-mail terry.keenan@foxnews.com.