TROUBLED WATERS OVER OIL.(Iran)

The past few months haven't been easy for Iran's President, Mahmoud Ahmadinejad. His refusal to halt Iran's uranium-enrichment program led the United Nations to impose sanctions in December. Inflation in Iran has exploded, with the price of commodities like bread and meat rising as much as twenty-five per cent. In the country's recent municipal elections, Ahmadinejad's political allies were crushed, and clerics and lawmakers have begun criticizing him in public. Worse still, through the second half of 2006 the price of oil tumbled almost thirty per cent, a disaster for an economy as dependent on oil revenue as Iran's. (The country pumps almost four million barrels of oil a day and ultimately exports more than half of it.) And then the Bush Administration said that it had authorized U.S. troops to detain or kill any Iranians found to be working with the Iraqi insurgency, and dispatched a second aircraft-carrier group to the Persian Gulf, sparking rumors that a military strike against Iran was in the works.

This latest confrontation with the U.S. should have been the capper to a bad winter for Ahmadinejad. Strangely, though, it may instead have brought about an upturn in his fortunes. Soon, oil prices started to rise, jumping twenty per cent in just two weeks. As a result, the Iranian regime suddenly has an extra twenty million dollars or so to spend every day, a windfall that will help Ahmadinejad to placate his critics and solve some of his country's more pressing economic problems.

The jump in oil prices wasn't entirely a geopolitical phenomenon--the cold snap in the U.S. was also a big factor--but it was driven in part by an increase in what oil traders call the "risk premium." When buying and selling oil, traders don't just look at today's supply and demand. They also try to forecast the future. And if buyers think there's a chance that supply is going to be lower down the line--because, say, Iranian oil fields will be shut down--they will be willing to pay a higher price today in order to guarantee that they will have the oil they need. That's why, in the run-up to the Iraq war, oil prices jumped more than fifty per cent. In the current confrontation between the U.S. and Iran, these same concerns create a perverse set of incentives: whenever the U.S. says things that make a military conflict with Iran seem more likely, the price of oil rises, strengthening Iran's regime rather than weakening it. The more we talk about curbing Iranian power, the more difficult it gets.

It's hard to measure the risk premium exactly, but most estimates suggest that in the past couple of years, thanks largely to the turmoil in the Middle East, it has accounted for somewhere between ten and twenty dollars on each barrel of oil. (Last year, Qatar's oil minister said, "If you can stop the politicians from making negative statements, I am sure you will see almost fifteen ...