On Monday this week, oil markets went into panic over the closure of the Strait of Hormuz, the choke point through which 20% of the world’s oil flows.
Early on Monday, the oil price spiked to nearly $120 a barrel from its level of around $91 on Friday last week. By yesterday morning, oil had slumped to below $90 a barrel. The day before the US and Israel launched their attacks on Iran, the oil price was slightly less than $67 a barrel.
Oil market participants, like most of us, do not really know how this war might unfold and hence have difficulty in pricing in risk. That is why there has been this massive overshoot and pullback.
For the moment, at least, the oil price has dropped back on the assurances of US President Donald Trump that the war would end “very soon” and that it was “very complete, pretty much.”
Markets often overreact to bad news, but then retreat. The fog of war and the immense uncertainty over how long the conflict will last make it difficult for the market to assess, on the balance of probabilities, where it is all going. That is also true of the retired generals on TV, the analysts, and the journalists.
In the second week of the war, with no evident victory in sight, there is an outpouring of often seemingly well-reasoned assessments of how and why things might now go awry. The fear is that the US and Israel do not have plans other than to decapitate the regime, destroy key government installations, and ensure that Iran is unable to develop nuclear weapons and project power into the region.
With no regime change plan in sight, there is a question as to whether the US and Israel see a critically weakened Iran in chaos as the acceptable alternative to an unimpeded Iran. The outcome would then be cast as US and Israeli payback for the October 7th terror attack on Israel, carried out by Hamas but widely blamed on Iran. For years, Tehran has financed and armed Hamas and its other proxies in the “ring of fire” it has sought to build around Israel.
Pete Hegseth, the US Secretary of War, says there is no reason the plan should be divulged to the enemy and the press. “We are willing to go as far as we need to, to be successful.”
But what would success look like in this case?
The absence of clearly stated war aims is troubling. US Secretary of State Marco Rubio talked about eliminating Iran’s nuclear and ballistic missile capabilities. Trump has spoken of an “unconditional surrender” and has said, “we want to be involved in the process of choosing the person who is going to lead Iran into the future.”
So, any claim of success has to be judged against these benchmarks.
A somewhat reformed Iranian government willing to dismantle its missile factories and abandon its nuclear programme would presumably meet the more limited war aims sketched by Rubio. Any move toward a secular democratic government might be an added bonus for Trump.
It would seem that either of these outcomes can be achieved without toppling the Mullahs and the Revolutionary Guard?
Some experts believe a split between revolutionary hardliners and pragmatists is on the way. The election by the Assembly of Experts of the new Supreme Leader, Mojtaba Khamenei, has set off new political dynamics. Some experts say Khamenei’s election means the chances of a split are far greater, but others say the opposite.
If the US seizes Iran’s oil export terminal on Kharg Island and cuts off Iran’s oil income, whoever wins the power struggle in Tehran will have to operate in a profoundly changed environment.
But what if air power alone does not yield success on the stated criteria?
In the first week of the war, the US and Israel used their air power to decapitate Iran’s ruling regime, degrade its air defences and missile stockpiles, and destroy key government installations. We are now supposedly waiting for US heavy bombers to pulverise Iran’s military and industrial base. If successful, that would make it hard for Iran to continue the fight.
However, there is a question over what the military calls the “magazine depth” in the US and Israeli military. They could be running out of the expensive bombs and missiles for attacks and anti-missile defence. Replenishing takes time and a lot of money. For the US and Israel, as well as the Arab countries, wars of this sort are highly expensive, which means Trump might have to go to Congress for more money.
Even a militarily and economically crippled regime in Iran might be able to stay in the fight if it has a sufficient number of missiles and drones hidden in caves or underground bunkers. These would allow it to maintain a reduced, but still effective attacks on its enemies and passing oil tankers.
Suppressing internal dissent will also be feasible as long as the Revolutionary Guard and the Basij militia remain undefeated. In recent days, Mullahs have warned protestors that they “will not allow the trash of the United States and Israel to take to the streets. If anyone goes out on the streets to protest, they will be treated like a Zionist soldier. Their blood is permitted,” declared a mullah.
Under a worst-case scenario, Iran will use its relatively few remaining drones and missiles to attack its neighbours’ seawater desalination plants and oil and gas refineries. That could lead to a mass humanitarian disaster across the Arabian Peninsula.
The ultimate prize in this war is control over the Strait of Hormuz. If the Strait remains a battlefield for months, the resulting disruption will mean soaring energy prices, serious world inflationary pressures, and a drastic slowing of the global economy. That raises the possibility of a type of prolonged stagflation similar to what occurred after the 1973 and 1979 oil shocks.
Another element of a worst-case scenario for the US, Israel, and Arab countries is that an undefeated Iran would continue to hurl drones and missiles at its enemies. There would be a need for follow-up operations and possibly boots on the ground. It is likely that Iran’s proxies would still pose a threat.
A great deal can be fed into the nightmare scenarios, but success often comes from better understanding and perseverance in overcoming what is in the worst-case scenarios.
The legacy of its past involvements means the US cannot let this be an endless war and can only permit a limited number of boots on the ground. It will have to find ways around these constraints.
The celebrated Prussian military theorist, Clausewitz, warned that “friction” — the problems encountered due to chance and chaos — can make original war aims unachievable. Sun Tzu, his Chinese counterpart, observed that the longer a conflict lasts, the higher the loss of resources and morale.
In the midst of a war, the issues raised by these theorists are always present and are overcome with sheer persistence.
For the US, Israel, and most Arab countries, Iran is far too important for it to be left in the hands of the mullahs.
[Image: https://www.flickr.com/photos/48722974@N07/5301246446]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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