Iran Is Winning Trump's Foreign Policy Gamble

Reuters
October 14, 2019 Topic: Security Region: Middle East Blog Brand: Lebanon Watch Tags: IranDonald TrumpSanctionsNuclearForeign Policy

Iran Is Winning Trump's Foreign Policy Gamble

Tehran is not willing to simply roll over and give up.

The oil price shock of 2008 preceding the Great Recession, and again in 2011 with the Arab Spring, demonstrate that oil crises can still bring down the global economy, even if at a higher price than in, say, 1973. Indeed, University of California San Diego economist James Hamilton notes that “all but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960.” Almost all of these events—bar the oil price shock of 2008—were associated with supply outages resulting from Middle East conflicts involving the Gulf countries. An oil shock resulting from a Persian Gulf War would not be the exception to the rule, but rather the most common trigger for a worldwide recession. The closure of the Strait of Hormuz for even a month or two would be sufficient to put the global economy into a deep downturn similar to the oil shock resulting from the 1979 Iran-Iraq war.

Nor can the Gulf’s oil be replaced by other sources. U.S. shales certainly provide a buffer, but our analysis suggests that shale production will peak in early 2020 if rig counts continue to decline as they have for almost a year. U.S. shales can be restarted with higher oil prices but adding just one mbpd would require six to eight months. The United States could not, even at a two-year horizon, displace a loss of more than two to three mbpd, regardless of the oil price. A loss of twenty mbpd would exceed anything U.S. shales could cover by an order of magnitude.

Nor is there space capacity outside the US. Since 2005, the United States by itself is responsible for almost three-quarters of the increase in the global oil supply. OPEC supply has hardly budged, and such reserves as exist are concentrated in Saudi Arabia and the Gulf countries, exactly those impacted by a closure of the Strait of Hormuz.

To an extent, production losses could be buffered by strategic reserves positioned around the world. Key countries maintain strategic stockpiles of perhaps two billion barrels of crude. This may sound impressive, but it represents only a three-month cushion at twenty mbpd. Moreover, oil prices would rise sharply far before the reserves approach exhaustion. Strategic reserves are unlikely to prevent market panic for more than a month or two at the most.

And the Iranians know that. Tehran, therefore, intends to put the Trump administration into an impossible bind, having to either passively countenance repeated strikes against Saudi facilities, escalate the conflict into an explicit war likely resulting in a global economic meltdown, or relenting and allowing the Iranians to export sufficient oil to fund essential government services.

Were Washington ruled by the simple logic of the matter, then a deal should be struck here. The Iranians are under tremendous pressure: the Abqaiq strike tells us that. An unprovoked strike on a nation’s critical infrastructure is a cause for war. That Tehran would risk it is a measure of its desperation.

Moreover, the choice of target is also illuminating. Iran could have struck military targets, or major civilian centers and inflicted major causalities. Rather, it only struck a processing plant, and at the time of the week when the facility’s staffing levels would be lowest and farthest from the processing lines. This tells us that Iran does not want war. Tehran is looking to inflict pain, but without the bitterness of death.

Further, the Abqaiq strike was not prepared by angry, irrational people, but by a professional, interdisciplinary team who carefully weighed their risk-return payoffs. They will appreciate that Iran is far better served by accepting some of the Trump administration’s twelve points demands than escalating the conflict.

These three factors tell us that Iran is ready to make a deal, and quickly.

Nevertheless, the strikes also tell us that Tehran is not willing to simply roll over and give up. If they are backed into a corner—and they are now—they are willing to resist. Iranian pride prefers to go down fighting than live cowering in the dark.

Within those constraints, however, a deal looks readily available.

How can the Trump administration respond? It cannot readily reward Tehran for smashing Saudi oil infrastructure. Indeed, Secretary of State Pompeo on September 25 laid down the official line: The more Iran lashes out the greater our pressure will and should be.

Therefore, events would seem to grind inexorably towards a military conflict between Iran and the United States.

Where events take us past this point is hard to say. The United States is unlikely to launch a land invasion of Iran; consequently, efforts would be limited to the use of airpower. On the other hand, airpower alone will not prevent Iran from taking potshots at slow-moving and easy-to-hit oil tankers. It is likely to be a mess; that much is for sure.

That is, of course, not the only possible outcome. To date, Trump can claim success in pressuring Iran. He has impressive cards to play and the numbers say he can quickly convert a deal far better than President Barack Obama’s. Will the White House seize the opportunity? Probably not—but the president may still have sixty days until the point of no return.

Steven R. Kopits is the president of Princeton Energy Advisors. He writes about oil markets and related geopolitics.

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