In their anxiety over the supply and price of crude oil, market observers may be watching the wrong side of the Persian Gulf.

In their anxiety over the supply and price of crude oil, market observers may be watching the wrong side of the Persian Gulf.

Attention focuses on Saudi Arabia, which has yet to make good on its conditional July 3 promise to unilaterally increase production by 500,000 b/d.

Speculation runs heavy that the House of Saud is withholding production for political reasons. An alternative view has it that the kingdom has encountered difficulty it doesn't want to disclose in hiking output beyond about 8 million b/d.

These are serious considerations. But they divert attention from trouble simmering in Iran.

Conflict is getting serious there between the ruling Islamic conservatives and elected reformist government.

Reports have increased over the past year of clashes between supporters of Supreme Leader Ayatollah Ali Khamenei and President Mohammad Khatami.

The problem recently turned violent in Khorramabad, between Ahwaz and Kermanshah in the western, oil and gas-producing part of the country. At the funeral of a mysteriously slain police sergeant last week, rioters seriously injured the provincial governor.

A week earlier, a pro-reform student group called Office to Foster Unity tried to hold a convention in Khorramabad and was resisted by supporters of Khamenei. Members of the group reported abductions and beatings.

The Financial Times reported that students openly called on the ayatollah to define his relationship with supporters now employing violence, which he has denounced.

Whatever his complicity in violence, Khamenei has taken an increasingly direct role in efforts to stifle reformist news organizations, and his supporters act ready to implement his decrees with force.

A long-restive divide thus widens between the revolutionary leadership and a president who took office after a landslide election victory in 1997 and who has scored further political gains since then.

Khamenei became supreme leader in 1989 after the death of Ayatollah Ruhollah Khomeini, leader of Iran's Islamic revolution in 1979. Under the constitution, he holds total authority. What Khatami wields is the popular support he demonstrated in his election, which overcame resistance from the clerical leadership, and political successes of his supporters since then. The next election is scheduled in May 2001.

The hard-liners' apparent resort to intimidation looks like the pre-election desperation of a theocracy sensing an erosion of power. But Khatami hasn't been able to stop it.

Ultimately, his power amounts to the uncertain ability to call a larger share of Iran's 66.5 million people to action against the ruling clerics. The prospect is not pleasant. But it's the direction in which the Islamic republic seems headed.

It would not be the first time. The revolution led by Khomeini began with student protests and strikes in the oil fields of western Iran. Since then, the power balance has been touchy and prone to violence. The possibility of another upheaval should surprise no one.

If it happens, Iran's 3.6 million b/d of oil production and 2.3 million b/d of exports will be in jeopardy.

Under any conditions, loss by the international market of that much oil is a jolt. But the current market, with inventories stubbornly low and idle production capacity scarce, operates with unusually little safety margin.

In other words, the market is less able than usual to handle a sudden and significant interruption to crude supply. If the Iranian political situation continues to deteriorate, it might face one before next May.

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