(Interviewed by Louis James, Editor, International Speculator)

L: Doug, last time we conversed, you said: "Let’s talk about what Clausewitz called ‘the extension of politics’ next time – I think the odds are increasing that we may see war rear its ugly head again soon."

There’s been a lot in the news lately about Israel blockading the Gaza Strip and about the potential for the Middle East to boil over. Is that what you had in mind?

Doug: I just got back from a trip to the Middle East – Iraq, actually. There’s a feature article on what I found there in this month’s Casey Report. Doing country studies has long been a specialty of mine, and I’ve got to say that most of what most people think they know about the place just ain’t so. But yes, I do think there is a very significant chance that we are headed for something that might vaguely resemble WWIII.

L: That’s going to be a pretty shocking statement to a lot of people – too much cognitive dissonance for most to let themselves think about it. Many readers might say that folks in the Middle East have been squabbling for years without the world going up in flames. Did you have a guru moment while there? Why now?

Doug: Well, people, especially Americans, forget that war, far from being an alien experience only read about in books, is actually a commonplace occurrence. Major powers have had major wars periodically throughout history. There’s no reason to imagine mankind has kicked the habit. It may not be the conflagration people once expected from a conflict between the U.S. and the Soviet Union, but it could still happen, and I suspect that the Middle East, Israel in particular, will be the epicenter.

One thing that drew my attention to this possibility again at this time is not what’s going on in Gaza but a friend of mine who had just been to a conference with an ex-director of the CIA, some high FBI officials, a whole bunch of defense department wonks, and similar types from Israel. He reports that all those spooks and military types really think Israel is going to attack Iran. The situation looks very serious to them. And one of Obama’s top military advisors has just said the U.S. itself has plans formulated, and they would be put into effect should the Iranians be proved to have nukes.

You add that to all you see in the news, including Iran’s new reactor plans and so forth, and we could be pretty close to the edge.

L: So, if Israel attacks Iran, presumably to prevent Iran from becoming a nuclear power, I can see the region going up in flames, but how does that become WWIII? I don’t think the U.S., Russia, and China are bound by treaty to enter the fray…

Doug: It may not. But the logic goes like this: Israel is just a tiny sliver of a country, about the size of New Jersey. It’s the kind of place that would be totally wiped out with just two or three nukes. And due to the nature of the place, those weapons could be delivered by yacht, or a cargo ship, or an airliner, or even a truck, for that matter. So Israel is very concerned about any hostile countries gaining nuclear capability – any of them that could produce just two or three such weapons could completely obliterate all of Israel. The spooks at the conference my friend went to all thought Israel would simply not allow any of its hostile neighbors to achieve that capability.

L: Okay, but isn’t "military intelligence" usually an oxymoron? They got 9/11 completely wrong (unless you believe the conspiracy theories).

Doug: It usually is. With failures like Pearl Harbor, the Chinese invasion of Korea, the Cuban missile crisis, and the Tet offensive to its credit… I’ve long held the president of the U.S. would do just as well reading the New York Times for intelligence. And the fact that the U.S. now has a literal army of people in intelligence – about 854,000 with Top Secret clearances, according to a recent Washington Post series – doesn’t mean the situation is going to get better. It means it’s going to get worse, because none of these people know who’s on first, and they all have competing agendas.

The U.S. government is far more out of control and byzantine than the Byzantines themselves could even have imagined.

Of course some of those guys are very good at what they do. But people rise in bureaucracies because of political infighting skills, not competence. What’s needed for sound decisions is a wise man in command, not hundreds of thousands of bureaucrats. And we don’t have a wise man in command, we have a glib ward healer from Chicago. If anything, he may be worse than Bush, which I didn’t think was possible.

But to get back to Iran: It’s important to recognize what has happened before. People forget that back in 1981, Israel bombed the Osirak nuclear reactor in central Iraq, just weeks before it was to be loaded with fuel. And in 2007, they did the same with Syria’s secret al-Kibar reactor.

But Iran is much further away, and they are building their reactors in hardened facilities – the jets that bombed Osirak barely had enough fuel to make it back to Israel – so Israel will probably need some help if it’s going to pull it off this time. And since Israel is practically the 51st U.S. state, the feeling is that the U.S. would get sucked into helping them. Or, even if the U.S. doesn’t help, it would still be blamed for not having kept its dog on a leash.

This is all compounded by the fact that the U.S. has been engaged in an unspoken War on Islam for close to three decades now, although it’s styled the War on Terror.

L: And if the U.S. gets dragged into it, it becomes WWIII. I get it. It’s interesting that Iran actually attacked the Iraqi reactor first, for much the same reason Israel did. Even more striking to me is that the UN boldly responded to Israel’s actions with… strong words. And those words included the assertion that self-defense did not justify preemptive strikes – but that’s exactly the excuse the U.S. used when its turn came to bomb Iraq.

Doug: I know – you can’t make this stuff up. Although Iran attacked the Osirak during the nasty war between Saddam and the Ayatollah, shortly after the Shah fell in 1981. But these things do happen. They can be hard to predict. Still, the evidence is building – the latest press reports have a new carrier group joining the U.S. Fifth Fleet in the Persian Gulf. It’s the type of thing that’s considered provocative by a neutral observer.

But the fact is that nuclear weapons have been around now for over 60 years. The technology for making them is well known and getting cheaper, easier, and better all the time. North Korea can make them; even a rich individual can. But why not buy them from a Pakistani general or even a Russian supply sergeant? Rogue regimes now recognize, based on Saddam’s experience, that having some nukes is the best way to prevent an invasion by the U.S., or someone else. Therefore, they will proliferate.

L: I wonder how the peace activists who voted for Obama feel about that… Pretty scary stuff.

Doug: It is. You know, historically, the U.S. typically picks entirely too many fights with little nothing nowhere countries – rabbit- and squirrel-size game in Central America or the Caribbean. All it’s ever done is foster the next generation of rebels; at best it puts in a right-wing strong man who’s recognized as a stooge and who makes the U.S. a lot of new enemies.

Anyway, Iraq was a country with only 20 million people, and even Viet Nam was not a large country at the time – and desperately poor. But Iran is genuine big game.

L: I just looked it up in the CIA World Factbook, and they say it has 67 million people as of an estimate last month, and is the 19th largest country in the world.

Doug: Yes. It’s a theocratic police state, with a highly regulated, state-managed economy. Everything is either subsidized or price controlled. The government gets 80% of its income from oil, but the fields are so badly run that production is going into decline. The fact is, if the U.S. just waits, economic collapse or revolt from the kids, or both, will bring the regime down. Instead, the U.S. may act as a catalyst to unify the people behind their goofy government. It’s completely perverse.

If this spins out of control, it could do some very, very serious damage. It’s not like the Iranian army isn’t expecting something. They’re an old civilization, they’re not stupid, and I’m sure they have contingency plans if they’re attacked.

L: I see. But even if the U.S. is drawn in, that makes the conflict one of global scope, but it doesn’t really plunge most of the world into war. I doubt China or Russia would attack the U.S. in retaliation. But I could see Muslim countries around the world deciding to go to war. This could become an open War on Islam – is that what you mean by WWIII?

Doug: Well, let’s just suppose that Israel, or Israel and the U.S., attack Iran before Iran can become a nuclear power. Now, what would the Iranians do? They could do nothing, which is what the Iraqis and the Syrians did when Israel bombed them…

L: Somehow, that doesn’t seem likely. They are a proud people. And their military had to have learned some lessons from the Iraqi experience with the U.S.…

Doug: I agree. A likely response would be to close the Strait of Hormuz, by way of punishing America through a denial of a large part of its oil supply. About 40% of all seaborne oil shipments pass through that strait – 20% of all the global oil supply. Its closure would be a major disruption to the whole world.

Of course, Obama would thump on his chest and say that Iran can’t be allowed to close international waters. Iran would likely say, "We just did. What do you expect after launching an unprovoked attack?"

It’s well known that sea-skimming missiles go 2,000 miles per hour. They have hundreds of them, maybe thousands, and they can be launched from small, fast boats. Even in the U.S.’ own war games conducted a few years ago, the U.S. Navy lost against these things. If the U.S. tries to open the Strait of Hormuz by force against Iran, I think it’s likely that most of the fleet will soon be turned into an artificial reef that divers in future decades will explore with morbid fascination. Militaries always fight the last war, and that’s precisely what the U.S. is doing with its carriers and B-2s.

L: Here’s a map. And then what?

Doug: Remember that WWI started with the assassination of one archduke. These things are chaotic and unpredictable, but one thing leads to another, drawing all sorts of parties into the fight as it spins out of control. The trouble is that the ante has gone up considerably since those days. The only way to win a game with nuclear weapons is not to play.

L: What if everyone who could help Israel attack Iran realizes this and refuses to help? Does peace have a chance?

Doug: Anything’s possible, but this is not the only flashpoint. The war in Iraq could heat up in all sorts of ways. Pakistan could boil over. There are probably 50 other combinations that could be as serious as the U.S. and Israel picking a fight with Iran. The global stage is a powder keg with many fuses. The situation with Israel is just one of them.

L: But that’s long been the case, what makes it more likely to blow now?

Doug: The economic crisis is just getting going. It’s important to remember that the whole world has been in a long boom, punctuated by relatively minor recessions, since 1946. What’s happening now is not just another cyclical recession. As it gets worse, and I’m quite confident it will, people will look for others to blame, and politicians will look for distractions to appease the masses. These factors are actively fanning the flames.

L: Nothing like a good war to distract people from their own misery – and their own responsibility for their individual circumstances.

Doug: That’s right, at least until their house gets blown up or their son gets killed. Nothing like a good foreign war against an invariably evil and subhuman enemy to distract people from local problems. And, of course, there are actually fools out there that believe war stimulates economies.

L: Yes… Can’t tell you how many times I’ve heard that WWII ended the Great Depression – they told me so in school, so it must be so. Alas, the dumb masses.

Doug: Indeed. If that were true, the best prescription for prosperity would be to make every city look like Berlin in 1945, so the economy would be restimulated as the starving masses rebuilt them with their bare hands. But I do think the conflict between Israel and Iran has high odds of happening. Whatever they say about peaceful uses – and, actually, Iran should have a massive nuclear program since it beats burning valuable oil for electricity – Iran is going to develop nuclear weapons. North Korea has shown that it’s the best thing they can do to protect themselves from the bigger kids on the block. And of course Israel can’t let them do that. These countries are on a clear collision course.

L: Grim. I don’t often wish you were wrong, but I do on this one. But it is what it is. Investment implications – beyond the obvious bet on soaring energy prices?

Doug: I have to say I have a problem with recommending many investments right now. As a speculator, I really only like to do things when they look very, very cheap, or very, very expensive. At which point I’ll go long or short, respectively. I don’t like even-odds bets or a level playing field. I only go for deals that seem, to me, to offer large returns for low risk. It should be as Warren Buffett said: a ball game with no called strikes, so you just wait and wait for the right ball to come over the plate. And, unfortunately, almost everything in the world looks expensive to me today.

I’ve said this before, but it bears repeating: it’s odd, prices being relative, for everything to be expensive. It’s a metaphysical impossibility – but there just aren’t any real bargains out there. We are in an investment Twilight Zone, where governments the world over are creating trillions of new currency units, and there’s still little or no evidence of higher prices. It’s a very dangerous time; we’re in the eye of the hurricane.

That preamble said, even with oil at a not-particularly-cheap $80/barrel, it is one of the cheaper commodities around and would look like a screaming bargain should the U.S. go to war with Iran. But even without that, for other reasons ranging from the geological to the political, there are many factors that could push oil prices up, and not many that would push them down radically, from here.

I wouldn’t bet on natural gas, because that’s a local market, and not so much uranium, though that will make a comeback too, because it’s the safest, cleanest, and cheapest type of mass power we have, and that will win out in the end. So, it’s oil, and, self-serving as I know it sounds, I have to say that the best investment strategist in the business is Marin Katusa, editor of Casey’s Energy Report. And let me say it again, gold is still in a definite bull trend.

L: Roger that. Well, thanks for another stimulating, if gloomy, conversation.

Doug: We could talk about lighter stuff, and sometimes we do, but this trend has become clearer in my mind of late, and I think people should consider it. Unlike the title of that idiotic book written a while ago, this isn’t The End of History. Regrettably, we’re very much a part of it.

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There’s nothing Marin Katusa, chief energy strategist at Casey Research, won’t do to find the next big energy opportunity… even, as he just did with Doug, visiting a Lundin property in war-torn Iraq to gauge the possibilities. Read his assessment – and much more – in this month’s Casey’s Energy Report… try it risk-free for 3 full months.