A few days ago, before the latest breakout in crude sent Brent to all time highs in GBP and EUR (and Asian Tapis in USD just shy of all time highs), we said that "we hope our readers stocked up on gasoline. Because things are about to get uglier. And by that we mean more expensive. But courtesy of hedonic adjustments, more expensive means cheaper, at least to the US government." This was due to recent news out of Iran "where on one hand we learn that IAEA just pronounced Iran nuclear talks a failure (this is bad), and on the other Press TV reports that the Iran army just started a 4 day air defense exercise in a 190,000 square kilometer area in southern Iran (this is just as bad). The escalation "ball" is now in the Western court." We were not surprised to learn that the "Western court" has responded in precisely the way we had expected. The WSJ reports: "The Pentagon is beefing up U.S. sea- and land-based defenses in the Persian Gulf to counter any attempt by Iran to close the Strait of Hormuz. The U.S. military has notified Congress of plans to preposition new mine-detection and clearing equipment and expand surveillance capabilities in and around the strait... The military also wants to quickly modify weapons systems on ships so they could be used against Iranian fast-attack boats, as well as shore-launched cruise missiles" Which means the escalation slider was just shifted up by one more level, as Iran will next do just what every actor caught in an Always Defect regime as part of an iterated prisoners' dilemma always does - step up the rhetoric even more, as backing off at this point is impossible. Which means that crude will go that much more higher in the coming days, as now even the MSM is starting to grasp the obvious - from the Guardian: "The drumbeat of war with Iran grows steadily more intense. Each day brings more defiant rhetoric from Tehran, another failed UN nuclear inspection, reports of western military preparations, an assassination, a missile test, or a dire warning that, once again, the world is sliding towards catastrophe. If this all feels familiar, that's because it is. For Iran, read Iraq in the countdown to the 2003 invasion." And the most ironic thing is that the biggest loser out of all this, at least in the short-term is.... Greece.

As a reminder, here is an update of US naval assets, courtesy of a recently up and running Stratfor:

More on the latest very much anticipated defection from the US in what is setting up to be either the biggest dud of geopolitical foreplay in history, or potentially the start of a new World War (because the Muslim cresent will not take too lightly to any joint or standalone US/Israeli aggression).

The military also wants to quickly modify weapons systems on ships so they could be used against Iranian fast-attack boats, as well as shore-launched cruise missiles, the defense officials said. The changes put a spotlight on what officials have singled out as potential U.S. shortcomings in the event of conflict with Iran. The head of Central Command, Marine Gen. James Mattis, asked for the equipment upgrades after reviews by war planners last spring and fall exposed "gaps" in U.S. defense capabilities and military preparedness should Tehran close the Strait of Hormuz, officials said. The Central Command reviews, in particular, have fueled concerns about the U.S. military's ability to respond swiftly should Iran mine the strait, through which nearly 20% of the world's traded oil passes. "When the enemy shows more signs of capability, we ask what we can do to checkmate it," a U.S. military officer said. "They ought to know we take steps to make sure we are ready." The U.S. is concerned that Israel—which believes that Tehran will soon be able to assemble a weapon, and that time is running short to stop the bid—may choose to strike Iran by this autumn to stymie such a program. That, defense officials worry, could provoke retaliation that could prompt U.S. military action to defend its troops and key allies, and to keep the Strait of Hormuz open. Central Command officials have told lawmakers they want the new mine-detection systems fielded before this fall, according to defense officials, underlining the urgency of preparedness. In addition, U.S. special-operations teams stationed in the United Arab Emirates would take part in any military action in the strait should Iran attempt to close it, defense officials said. A military official said these forces have been working to train elite local forces in Gulf nations including the U.A.E., Bahrain and Kuwait, but added: "They would be used in the event of active operations."

Alas, as our game theory familiar readers will attest, the realistic outcome of recent events is not encouraging:

If two players play prisoners' dilemma more than once in succession and they remember previous actions of their opponent and change their strategy accordingly, the game is called iterated prisoners' dilemma. If the game is played exactly N times and both players know this, then it is always game theoretically optimal to defect in all rounds. The only possible Nash equilibrium is to always defect. The proof is inductive: one might as well defect on the last turn, since the opponent will not have a chance to punish the player. Therefore, both will defect on the last turn. Thus, the player might as well defect on the second-to-last turn, since the opponent will defect on the last no matter what is done, and so on. The same applies if the game length is unknown but has a known upper limit.

For those confused, terminal defection means pushing the "Launch" key. And even mainstream journalists appear to have grasped what has finally dawned upon the energy market (if with the now usual 6-8 week delay):

A decisive moment may arrive when Barack Obama meets Israel's prime minister, Binyamin Netanyahu, in Washington on 5 March. "The meeting … will be definitive," said Ari Shavit in Haaretz. "If the US president wants to prevent a disaster, he must give Netanyahu iron-clad guarantees the US will stop Iran in any way necessary and at any price after the 2012 [US] elections. If Obama doesn't do this, he will obligate Netanyahu to act before the 2012 elections." If accurate, this is not much of a choice. It suggests military action by the US or Israel or both is unavoidable, the only question being one of timing. Objectively speaking, this is not actually the position. All concerned still have choices. The case against Iran's nuclear programme is far from proven. It is widely agreed that limited military strikes will not work; a more extensive, longer-lasting campaign would be required. And Obama in particular, having striven to end the Iraq and Afghan wars, is loath to start another. But as with Iraq in 2003, the sense that war is inevitable and unstoppable is being energetically encouraged by political hardliners and their media accomplices on all sides, producing a momentum that even the un-bellicose Obama may find hard to resist.

Will Obama truly risk sending gas prices to all time highs month ahead of his election, just in time to send the global economy into a spiraling recession where not even the fabled US decoupling (purely driven by the $2 trillion in liquidity expansion by non-US central banks)? Who knows: however, if he hopes to use the iraq playbook, he may be disappointed. Again from the Guardian:

In some key respects, the Iran crisis is distinctly different from that over Iraq in 2002-03. As matters stand, similarly strident warmongering surrounding Iran is thus hard to understand or explain – unless the ultimate, unstated objective is not to curb Iran's nuclear programme but, as in Iraq, to overthrow its rulers. Bogeymen



George Bush and Tony Blair claimed a moral imperative in toppling the "monstrous" dictatorship of Saddam Hussein. But the much vilified Mahmoud Ahmadinejad, Iran's president, is no Saddam, and neither is the country's bumbling Supreme Leader, Ayatollah Ali Khamenei. The Iranian regime is repressive and sporadically brutal, but so too are many developing world governments. Unlike Saddam's Ba'athists, it has significant democratic and ideological underpinning. As a bogeyman whose depredations might justify international intervention, Ahmadinejad is a flop. Weapons of Mass Destruction



Saddam, notoriously, had no deployable or usable WMD, but his overthrow was primarily justified by the mistaken belief that he did. The present western consensus is that Iran is seeking nuclear weapons capability, but does not have an atomic bomb and is not currently trying to build one. Khamenei said this week that nuclear weapons were "useless and harmful" and that possessing them was sinful . Netanyahu's belief that Israel faces an imminent, existential threat is visceral rather than fact-based. Israel's refusal to acknowledge its own nuclear arsenal, let alone contemplate its reduction, further undermines the case for action. Terrorism



Plenty of evidence exists that Iran supports, or has supported, armed militants, jihadis, and anti-Israeli and anti-western armed groups in Palestine, Lebanon, Syria, Iraq and Afghanistan, providing financial and political backing, arms and training. In this respect, its behaviour is more threatening to western interests than was that of Saddam's secular regime, no friend to Islamists. But limited or even protracted attacks on Iran's nuclear and/or military facilities would not end these links, unless there was a shift of political direction in Tehran. Strategic power-games



Iraq was considered important for its strategic position at the heart of the Arab Middle East and its economic potential, especially its oil reserves. Similarly, there can be no doubt the US and Britain would like to see energy-rich Iran return to the western camp, as in the pre-revolution days of the Shah. Conversely, Iran's military is more powerful and more committed to the defence of the status quo, from which it benefits greatly, than was Iraq's. The potential disruption to oil supplies and western economies, not to mention the impact of asymmetric Iranian counter-attacks, makes a resort to war contingent on producing lasting dividends. Political imperatives



In contrast to the splits over Iraq, the main western powers are united in their determination to bring Iran to heel. As well as Netanyahu, David Cameron, Nicolas Sarkozy and Barack Obama have all declared an Iranian bomb unacceptable. Their inflexibility thus makes war more rather than less likely should Iran refuse to back down. "Having made the case for urgency and concerted action, it would be difficult for Obama to tell the world 'never mind' and shift to a strategy that accepts Iranian membership in the nuclear club," said Michael Gerson in the Washington Post.

Yet while nothing may well be the final outcome, one thing is certain: Greece is in deep trouble. As a reminder, the insolvent country is one of those affected by the Iranian decision to cut off European exports. And as Athens News reports: "Greece relied on Iran for more than half of its oil imports during some months last year after traders and oil majors pulled the plug on supplies and banks refused to provide financing for fear that Athens would default on its debt."

Major traders are in talks with Greece to supply crude oil and help the country cut reliance on Iranian oil ahead of a European ban, in a sign that they are happier about Greece's creditworthiness following a second debt bailout. Greece turned to Iran as a supplier of last resort last year despite pressure from Washington and Brussels to end trade as part of a campaign against Tehran's nuclear programme that the West says is for arms and Iran says is for energy. Traders told Reuters that Swiss-based Totsa, the trading arm of French oil major Total, and trading house Mercuria were in separate negotiations with Greek refiner Hellenic Petroleum to help it replace Iranian crude. Glencore, a leading Swiss-based commodities trader and one of the few that conducted business with Greece during the debt crisis, may also boost supplies, trading sources said. Two industry source said talks were at advanced stages. A third industry source said negotiations were at an early stage. "If something were to happen, it would be unlikely before summer," one source said.

The reason for the delay? Why certainly that Greece has some money to pay, i.e., passage of the bailout (that Greece won't see a single penny out of it is a different story entirely)

Hellenic acknowledged earlier this week that it was buying oil from Iran and paying for the shipments later, terms known in industry jargon as open credit terms. But the refiner also said that replacing Iranian oil would be "easy" with supplies from Saudi Arabia, Iraq and Russia. Traders expect the terms offered by alternative oil suppliers to be far less generous, as many are still unable to enter into agreements with Greece because of the risk associated with the country's debt. Part of the reason for swapping crude oil for products is that Hellenic is unable to obtain letters of credit from banks because of lingering default fears. "They have liabilities and banks could come in and demand payment," said a London-based trading head who decided not to enter talks with Hellenic, saying it was too risky for his firm. However, Greece's second bailout this week provides reassurance that any crude supplied to a refinery would not be caught up in a messy national default. Hellenic, which has 350 million euros of debt maturing this year and 1.3 billion in 2013, has started refinancing discussions with banks. It said it hoped that the bailout deal would allow Greece to return to markets and ease Greek companies' refinancing strains.

In other words, war or no war, Greece better pray that Europe at least pretend to fund the second bailout agreed upon on July 21, 2011, as otherwise, the country will be out of crude by the summer. Of course, if there is no bailout, the country will also be broke by then too, with rioting and bank runs a daily occurrence. Perhaps seen in this light, a gasoline shortage doesn't seem all that bad...