(FORTUNE) - Be afraid. Be very afraid.

Fortune Magazine
By Nelson Schwartz, FORTUNE senior writer
January 27, 2006: 4:40 PM EST

DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.

That's the message from two of the world's most successful investors
on the topic of high oil prices. One of them, Hermitage Capital's Bill
Browder, has outlined six scenarios that could take oil up to a
downright terrifying $262 a barrel.
Investor George Soros says Iran is heading for a confrontation with
the West.
Investor George Soros says Iran is heading for a confrontation with
the West.

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The other, billionaire investor George Soros, wouldn't make any
specific predictions about prices. But as a legendary commodities
player, it's worth paying heed to the words of the man who once took
on the Bank of England -- and won. "I'm very worried about the
supply-demand balance, which is very tight," Soros says.

"U.S. power and influence has declined precipitously because of Iraq
and the war on terror and that creates an incentive for anyone who
wants to make trouble to go ahead and make it." As an example, Soros
pointed to the regime in Iran, which is heading towards a
confrontation with the West over its nuclear power program and doesn't
show any signs of compromising. "Iran is on a collision course and I
have a difficulty seeing how such a collision can be avoided," he says.

Another emboldened troublemaker is Russian president Vladimir Putin,
Soros said, citing Putin's recent decision to briefly shut the supply
of natural gas to Ukraine. The only bit of optimism Soros could offer
was that the next 12 months would be most dangerous in terms of any
price shocks, because beginning in 2007 he predicts new oil supplies
will come online.

Hermitage's Bill Browder doesn't yet have the stature of George Soros.
But his $4 billion Moscow-based Hermitage fund rose 81.5 percent last
year and is up a whopping 1780 percent since its inception a decade
ago. A veteran of Salomon Bros. and Boston Consulting Group, the
41-year old Browder has been especially successful because of his
contrarian take; for example, he continued to invest in Russia when
others fled following the Kremlin's assault on Yukos.
Doomsdays 1 through 6

To come up with some likely scenarios in the event of an international
crisis, his team performed what's known as a regression analysis,
extrapolating the numbers from past oil shocks and then using them to
calculate what might happen when the supply from an oil-producing
country was cut off in six different situations. The fall of the House
of Saud seems the most far-fetched of the six possibilities, and it's
the one that generates that $262 a barrel.

More realistic -- and therefore more chilling -- would be the scenario
where Iran declares an oil embargo a la OPEC in 1973, which Browder
thinks could cause oil to double to $131 a barrel. Other outcomes
include an embargo by Venezuelan strongman Hugo Chavez ($111 a
barrel), civil war in Nigeria ($98 a barrel), unrest and violence in
Algeria ($79 a barrel) and major attacks on infrastructure by the
insurgency in Iraq ($88 a barrel).

Regressions analysis may be mathematical but it's an art, not a
science. And some of these scenarios are quite dubious, like Venezuela
shutting the spigot. (For more on Chavez and Venezuela, click here.)

Energy chiefs at the World Economic Forum in Davos downplayed the
likelihood of a serious oil shortage. In a statement Friday, Shell's
CEO Jeroen Van der Veer declared, "There is no reason for pessimism."
OPEC Acting Secretary General Mohammed Barkindo said "OPEC will step
in at any time there is a shortage in the market." But then no one in
the industry, including Van der Veer, foresaw an extended run of $65
oil -- or even $55 oil -- like we've been having.

It's clear that there is very, very little wiggle room, and that most
consumers, including those in the United States, have acceded so far
to the new reality of $60 or even $70 oil. And as Soros points out,
the White House has its hands full in Iraq and elsewhere.

Although there are long-term answers like ethanol, what's needed is a
crash conservation effort in the United States. This doesn't have to
be command-and-control style. Moral suasion counts for a lot, and if
the president suggested staying home with family every other Sunday or
otherwise cutting back on unnecessary drives, he could please the
family values crowd while also changing the psychology of the oil
market by showing that the U.S. government is serious about easing any
potential bottlenecks.

Similarly, he could finally get the government to tighten
fuel-efficiency standards and encourage both Detroit and drivers to
end decades of steadily increasing gas consumption. These kinds of
steps would create a little headroom until new supplies do become
available or threats like Iran's current leadership or the Iraqi
insurgency fade.

It's been done it before. For all the cracks about Jimmy Carter in a
cardigan and his malaise speech, America did reduce its use of oil
following the price shocks of the 1970s, and laid the groundwork for
low energy prices in the 1980s and 1990s. But it would require
spending political capital, and offending traditional White House
allies, and that's something this president doesn't seem to want to do.

http://money.cnn.com/2006/01/27/news/international/pluggedin_fortune/index.htm?cnn=yes

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