Oil markets have "minimized" key geopolitical risks in the Middle East, including the vulnerability of Saudi oilfields to Iran, according to James Stavridis, vice chairman of the Carlyle Group.
There is a one-in-three chance of regime change in Tehran, he said today at the Argus Americas Crude Summit in Houston, Texas, despite the leadership structure there remaining very fragile.
"If you look at history, the spasms of dying regimes can be very ugly," said Stavridis, the former Nato supreme allied commander.
He pointed to the risks to Saudi oil fields as well as retaliatory action the Iranians could take in the event of US military strikes that do not prove conclusive, such as ordering the closure of the Strait of Hormuz, a key chokepoint for crude markets.
There is a risk the Iranians could mine the shipping route, as well as wreck havoc in the region with attacks on shipping that paralyze the channel, he said. Such moves would only prove temporary in blocking the route, however, though it would still take 30-60 days for it to be reopened.
At the moment, US president Donald Trump appears to be pushing for a diplomatic solution, though he has not removed the military option, he said.
"If we can get a deal that takes Iranian nukes off the table, curtails their ballistic missiles and throttles what's left of their proxies, that's a diplomatic deal worth taking," Stavridis said.
He predicted that there would be about a week of such diplomatic efforts going forth and back to try to come to a resolution before it would be "crunch time" for Trump to decide on his next move.
Better odds in Venezuela, Ukraine
Two other key crude market challenges -- successfully rebuilding Venezuelan crude production following the US' recent military intervention and ending the war in Ukraine -- have somewhat better odds of being resolved in the coming year, he said.
While he agrees that Venezuela continues to be "uninvestible" as ExxonMobil chief executive Darren Woods said at a White House meeting last month, Stavridis said an increase in production has a "better than even" chance, or a 2-in-3 odds, of coming to fruition.
The odds of ending the war between Russia and Ukraine are much better, 1-in-2, he said, but it will likely involve international recognition of Crimea and the Donbas region as being part of Russia.
"If all three of those happen over the next 6-12 months, and I am an oil executive, I would be thinking, 'Okay, what are the ramifications of that violent success, of all those companies coming back on? How does that impact me?'" Stavridis said.
Separately, Stavridis said he was surprised that markets have continued to shrug off geopolitical turbulence, with stocks moving ever higher.
"To me, there's a cognitive dissonance between the level of geopolitical turmoil and the almost relentless upward motion of economies," he said. "That bill is going to come due – maybe even this year."
