To understand the Iranian drama requires dual lenses. To the left are the nuclear talks, in which international negotiator Yukiya Amano has announced a potential breakthrough -- Tehran may agree to serious scrutiny of its nuclear research installations. To the right are Western-led sanctions, an attempt to motivate Iran as regards the left lens by slashing its main source of hard cash -- oil export revenue.

We are focused today on that right lens. But to dispense with the left first, Amano, head of the International Atomic Energy Agency, yesterday publicly announced the potential for a new day with Iran (above left, with Iranian nuclear negotiator Said Jalili). IAEA inspectors might for the first time in a half-decade take a look at all the sites, and interview all the players, that they have sought in order to remove the conclusion that Iran is bent on possessing a game-changing nuclear weapon. Later talks could focus on the end-game, which is elimination of Iran's weapons-grade nuclear material.

This announcement instantly unsettled my antennae. In most processes, announcements coincide with the peak achievement. According to that logic, the peak should be an actual binding agreement. That we get it when the peak is simply anticipated makes me suspicious that something less is forthcoming. Amano, himself a past doubter as to Iran's genuineness, says he perceives real movement this time.

Putting that aside, let's skip to the right lens -- the sanctions. As of July 1, they deny Iran access to the international banking and insurance system, without which it is very, very difficult to conduct a large-scale oil business. This blog has been skeptical that the sanctions will work -- the history of Iraq and South Africa, for example, shows that stubborn nations can work around apparently crippling sanctions. Iran specialists say the evidence is that Tehran is either anticipating or already feeling the pain, hence its presence and attitude at the talks. We are watching.

In an angle missed by everyone else as far as I can tell, the Financial Times' Javier Blas, James Blitz and Geoff Dyer report on Western sanctions tinkering. This is an attempt to address a serious flaw in the sanctions strategy that, if left untended, could seriously boomerang on the international community.

[Update: at Eurasia Group, David Gordon reminds me that their own Greg Priddy and Cliff Kupchan pointed out this problem, and its solution, a week ago at the New York Times a week ago. It is a must-read.]

The flaw involves tanker insurance, which no tanker will go without and risk the potential of billions of dollars in liability should there be an accidental spill or other incident. The tinkering is to waive the sanctions to allow insurance for certain volumes essentially to four countries -- China, India, Japan and South Korea. These are the biggest customers for Iran's 2.2 million barrels a day of oil exports. The last three have agreed to cut back their purchases, but still intend to buy some, which the West actually has encouraged. But the worry is that they won't buy any at all if there is no tanker insurance, or that rogue insurers could step in and offer so much insurance that the sanctions could become meaningless.

You see, in a perfect sanctions world, the punishment is bad for the victim, and does not inconvenience anyone else. However, should too much Iranian oil vanish from the global market, prices could surge, which would be very inconvenient, say, to President Barack Obama, currently a candidate for re-election, not to mention the struggling economies of Europe.

So the idea is to exchange this insurance tinkering -- they are calling it a shipping waiver -- for an Iranian "pledge" not to develop nuclear weapons. The trick is to do this in a way that does not appear weak, since pledges are not enforceable. To check this logic, I queried Daniel Byman, a Middle East analyst and professor at Georgetown University. Byman:

A pledge would be viewed with a lot of suspicion; [it would be] better than nothing, but most would doubt. And Obama could not publicly embrace this politically.

Yet Byman also thinks the story is credible. "Europeans are far more amenable to this than the U.S.," he told me. "It depends what the [Iranian] guarantees are in practice."According to the FT, the U.S. is together with Europe in the shipping waiver idea, the strategy being to lock in the cuts to Iranian exports, and no more. Here is what Citibank's Ed Morse told me about the report:

The shipping waiver is a bone. It enables the original sanctions to go into effect globally but enables those governments who limited the amount of oil being imported to have insurance coverage for that amount of oil. It reduces the impact of the unintended consequences of ancillary sanctions on insurance and makes for smoother relations with allies.

What troubles me is the attempt to be clever. When you try to be perfect in real life, you can end up with some imperfect results. Take our economic history of the last decade.

The mysterious psychology of price: The well-established wisdom is that consumers respond to psychological price points -- offer your product at $9.99, and shoppers are far more likely to buy it than at just a penny more, or $10. So it has been with gasoline: In 2008, American car-buyers fled gas-guzzling vehicles when fuel crossed the $4-a-gallon price point, bought more fuel-efficient models, and generally drove much less. This year, the same seems to have occurred, as I wrote -- with gasoline again approaching an average of $4 a gallon, we see far greater sales of fuel-efficient vehicles. Yet is it so simple? Perhaps not, says Paul Hunt, president of Pricing Solutions, a Toronto-based firm that advises companies on how to price their products. Hunt told me that consumers may only seem to be responding more negatively to $4 than to $3.99 a gallon, but that something else may actually be going on in their collective heads. It is not the per-gallon rate that sets a motorist's hair on fire, Hunt said. It is the $66.81 total price of filling up.

But when it comes to buying, are gasoline and shoes truly such different creatures? Surely, I asked Hunt, the sight of $4 on the gasoline station signboard is enough to drive off immediately to the Kia showroom. Only in the big picture, he replied. "People really look at the total fuel bill and make sure they can go to a restaurant once a week rather than pay for fuel," he said.

Maybe in 2008 it looked like people were making a decision because of $4 gas, but actually it was the total price that influenced them. [They are thinking], ‘It cost me $85 to fill up, and I want to save $10 a week.' They do the math.

Furthermore, the price has to stick. Even that $85 gas bill won't have a lasting impact unless a driver thinks that will be the price for a long time to come.

In a curious footnote, Hunt said that although price-per-gallon is not the pivotal fact on the way up, it can be on the way down. Motorists watch the signboard for a price that to them signifies "cheap." Then "they go hit the pumps," Hunt told me. "When prices are moving down, people have something that attracts them."

Go to the Jump for more of the Wrap.

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The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration's thinking. Against worries that the sanctions have gone too far, too fast -- removing too much Iranian oil from the global market -- the Administration intends to continue trying to choke off Tehran's oil revenue, with the hope of forestalling its nuclear development.

The Administration is pursuing two conflicting containment goals: to halt Iran's acquisition of nuclear weapons, and cap surging oil prices during an election year. Its bet is that it does not have to ease up on the former in order to achieve the latter.

The U.S. Treasury Department has clamped on banking restrictions punishing institutions that facilitate payment for Iranian crude, and U.S. officials have traveled around the world to persuade importing nations to buy less Iranian oil. The European Union meanwhile has decided to halt all Iranian oil imports by July 1. Analysts think that these dual tracks have worked so well that it is as though we are already at July 1 (pictured above, gasoline prices in Los Angeles three days ago).

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In the last episode, we were awash in gas: President Barack Obama is using the language of a shale gas enthusiast, crowing this week that the United States has sufficient reserves of the fuel to last 100 years. For that reason, the U.S. ought to push ahead with natural gas development, as long as safety concerns are kept in mind, said Obama (above, pictured this week on the campaign trail). Almost simultaneously, though, large volumes of that gas have vanished. First, the administration's own energy think tank -- the Energy Information Administration -- sharply lowered its estimate of U.S. shale gas reserves: rather than the 827 trillion cubic feet in unproved technically recoverable reserves announced last year, the EIA estimates that the country has 482 trillion cubic feet, or 41 percent less. The drop is understandable -- it has to do with the addition of completed wells, which provides more data points for the EIA to insert into its reserves model. But some serious analysts think even the lowered numbers are soft; Chris Nelder, for instance, writes that all that can be surmised credibly is an 11-year supply of gas at current consumption rates.

Then there is actual production. Chesapeake and ConocoPhillips have both announced the withdrawal of a substantial volume of gas from the market because of firesale prices that prevail, currently $2.77 per 1,000 cubic feet, compared with $13 in 2008. Chesapeake -- the second-largest U.S. gas producer -- said it will sell 8 percent less gas this year than last; Conoco says it will lower production by 4 percent. It is not that the companies are going broke -- as discussed previously, much of the gas is in the same geological formations as highly lucrative oil, so drillers themselves say they earn excellent profit regardless. Yet, they would like to earn greater profit still by driving gas prices higher through the law of supply and demand -- currently, there is a super-glut of gas; they would like to reduce that to a mere glut. Of course, the drillers in part have themselves to blame for sagging U.S. gas demand: In 2009, the shale gas industry vigorously opposed Obama's push for cap-and-trade legislation, under which electric utilities  would have accelerated their transition from coal- to gas-fired plants. The drillers would be selling much more gas, and prices would thus probably be higher. Alas, those politics were not to be. The Financial Times' Ed Crooks quotes Oppenheimer's Fadel Gheit: "I would expect all large gas producers without exception to scale back production this year."

These developments are important for a single reason: The U.S. is the epicenter of the global shale gas boom. Because of the U.S. bonanza, for example, Russia has been shaken in Europe. China might be next to join the boom. It is importing U.S. technology; if it succeeds in producing substantial shale gas, it could transform its own set of circumstances. But if the numbers are consequentially smaller than supposed, and if the market is slow to absorb the higher volumes, the geopolitical outcomes will be muted.

Go to the Jump for more of the Wrap

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The geopolitics around us -- mainly Iran and Nigeria -- are keeping oil prices aloft. But should traders lose the fear of Tehran closing the Strait of Hormuz, and Nigeria's Goodluck Jonathan not managing to make peace with his striking countrymen, look for the air to go out of prices that, despite the continuing European economic crisis, exceed $100 a barrel. And if they drop far enough -- into the low-$80s-a-barrel range -- some key petro-states are going to be in serious trouble, according to a couple of analysts from the Eurasia Group.

In a blog post at the Financial Times, Eurasia's Chris Garman and Robert Johnston scrutinize Russia, Nigeria, Venezuela and Saudi Arabia. Garman and Johnston's presumption is that oil demand remains soft in the U.S. and Europe, and erodes the impact of an expected rise in Asian oil consumption. As a result, Saudi Arabia attempts to retain a floor under prices by reducing production, but that just creates a vicious circle: Lower actual Saudi production necessarily means higher idle production capacity, also known as spare capacity. As far as petro-states are concerned, that is a deadly brew.

Oil prices are determined at precisely that inflection point -- spare capacity. Oil traders in London and New York compare global oil demand and the capacity of petro-states to meet it, and if the gap between the two numbers is exceptionally narrow -- if there is barely enough production capacity to satisfy demand -- then traders will bid up the price. When they do so, they are betting on the blowup risk of an event like anti-Iranian sanctions or Nigeria's street protests, and the loss of existing oil exports. This risk is based on the following question: Do or do not states such as Saudi Arabia possess sufficient spare capacity to make up for those lost exports?

Similarly, if the gap between the numbers is super-wide -- such as would occur this year in the Eurasia scenario -- traders will bid down the price, since it almost wouldn't matter what geopolitical event occurred: There is still plenty of spare capacity to compensate for almost any loss of production.

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