Crude oil prices dropped today by 4.5%, the most in seven months, as investors bet that U.S. summer fuel demand has peaked. Given the large size of speculative long positions in the market, further downward pressure in the short-term cannot be ruled out. The price of oil is one of the major factors in the valuation of alternative energy stocks. Higher oil prices increase demand for alternative energy, while lower oil prices could lead to investors questioning some of the lofty valuations in the sector.

The possibility of an attack on Iran by Western powers looms due to the latter's alleged nuclear weapons ambitions. Such an attack could create serious oil supply disruptions because Iran sits on the eastern flank of the Straits of Hormuz, the channel in which almost all of the oil from the Persian Gulf flows on tankers to industrialized nations. Blockage of the Straits of Hormuz would disrupt a significant percentage of world oil supplies and potentially send crude oil prices northwards to $100/barrel. This could lead to massive gains for alternative energy stocks as investors try to hedge higher energy costs. 

Albert Einstein said "you cannot simultaneously prevent and prepare for war." That is why I am concerned about the recently announced U.S.-Saudi arms package. Secretary of State Condoleezza Rice said Sunday that the arms deal with Saudi Arabia and other Arab nations was an important move to protect U.S. allies in the Gulf region from Iran. It looks like the U.S. is pursuing two sets of policies: to counter the growing domestic pressure to withdraw its troops by making the war seem profitable, and inciting instability in the region to encourage Middle East states to buy U.S.-made arms.

The bad news is that the U.S. may already be at war with Iran. Tehran seems convinced that the United States and other foreign powers are actively exploiting Iran's diverse ethnic and sectarian society by supporting violent secessionist and insurgent movements – including terrorist groups – in an effort to destabilize the government. It seems plausible that a sharp increase in domestic unrest orchestrated from abroad will precede any U.S. attack. After all, the main lesson learned from Vietnam and Iraq is that we shouldn't send American boys to fight American wars.

Some analysts suggest that the shifting geopolitical landscape in the Middle East after the U.S.-led invasion of Iraq in 2003, which propelled traditionally oppressed communities such as Shi'ite Arabs and Kurds to unprecedented positions of power and influence in that country, has also emboldened Iranian minorities to agitate for greater cultural rights and political representation.

But Iran is fighting back. Barrons points out that public executions are increasing as a tactic to terrorize an increasingly restive population. Over the past six weeks, at least 118 people have been executed, including four who were stoned to death. According to Saeed Mortazavi, the chief Islamic prosecutor, at least 150 more people, including five women, are scheduled to be hanged or stoned to death in the coming weeks. The latest wave of executions is the biggest Iran has suffered in the same time span since 1984, when thousands of opposition prisoners were shot on orders from Ayatollah Khomeini.

The nationwide crackdown is accompanied by efforts to cut Iranians off from sources of information outside the Islamic Republic. More than 4,000 Internet sites have been blocked and more are added each day. Since April, some 30 newspapers and magazines have been shut and their offices raided. At least 17 journalists are in prison, two already sentenced to death by hanging.

I wouldn't be surprised if Western intelligence agencies are involved with the current social instability in Iran. To me, that shows that the planning phase of a war is well underway. The proxy wars between the U.S. and Iran continue, and last year's conflict in Lebanon was a mere preview of what's to come (what we saw last summer was a move up from $60/barrel to $75/barrel on the conflict between Israel and Lebanon).

I don't believe diplomacy is going to solve the conflict. Iran will keep building their bomb and $100/barrel oil is around the corner unless Saudi Arabia flexes its muscle. If Iran doesn't cooperate and creates more instability in the Middle East, the Saudis should respond by opening their oil taps and bringing down the price of oil. If Iran cooperates, they get higher oil prices. However, U.S.-Saudi relations have recently taken a knock after King Abdullah of Saudi Arabia told Arab leaders that the American occupation of Iraq was illegal. Deteriorating relations between Saudi Arabia and the U.S. will severely limit options in dealing with Iran.

I believe that a confrontation with Iran will take center stage in 2008. Unless the Saudis can save the day, get ready for $100/barrel oil prices. The war on Iran has already started, and alternative energy is likely to be a big winner (that is, if anyone is a winner in a war).

Disclaimer: I am a proud South African citizen living and working in the United States. I regret that my taxes are used to fund a war in Iraq.