War with Iran could send oil prices to $250 per barrel

As tensions between Iran and the US continue to escalate, analysts have begun to consider the likelihood and consequences of an Iran war.

There has been much talk of an Iran War in recent weeks, but the likelihood of a war, whether intentional or accidental, is relatively small for the simple reason that the leaders of Iran and the US don’t want one. President Donald Trump, who has been remarkably faithful to his campaign promises, to the chagrin of many, doesn’t want another Iraq-like war – with a quick victory followed by a long defeat. Ayatollah Ali Khamenei, Supreme Leader of Iran, doesn’t want his revolution and country crushed by the massive military might of America.

This is not to say there aren’t powerful individuals in the Trump administration – such as National Security Advisor John Bolton and possibly Secretary of State Mike Pompeo – and regional allies – Israel, Saudi Arabia and United Arab Emirates (UAE) – who want a war to bring about regime change in Iran, and who are willing to stir the pot in an attempt to make it happen.

Trump’s personal preference for Iran may also be regime change, with a negotiated neutering of the Islamic Republic his next best outcome. But he probably would settle for long-term containment of Iran through his “maximum pressure” campaign, accepting that the Iranian regime would likely be able to sustain itself though skirting sanctions.

Iran has made huge geopolitical gains in the Middle East since the US inadvertently pushed Shiite-majority Iraq into the Iranian sphere of influence by imposing democracy on the country following the 2003 war. Tehran now directly or indirectly controls an arc of territory north of Saudi Arabia – Iraq, Syria and Lebanon – while supporting Houthi rebels to the south of the kingdom in Yemen.

Although US sanctions on Iran’s oil and metal exports are unlikely to bring about regime change, they will make it significantly more difficult for the Islamic Republic to consolidate its territorial gains and sustain its regional proxy network, as the government will have to prioritize domestic spending to maintain social stability. Simply put, the sanctions make it more difficult for Iran to directly challenge its regional enemies, Israel, Saudi Arabia and UAE and score additional foreign policy victories.

Despite an aversion to war with the US, it appears Khamenei has given Qassem Suleimani, leader of Iran’s powerful Quds Force and national hero, permission to encourage foreign militias aligned with Tehran to cause mischief for US and allied forces in the Middle East, and if possible, disrupt the flow of oil from the region through non-attributed actions.

The Iranian goal is to break the resolve of the US, given American military retreats from the Middle East in the past – Lebanon (1984), Iraq (2011), and Syria (presently) – and to increase the cost of Iranian oil sanctions on the global economy through additional disruptions to supply.

This is obviously a dangerous game that could lead to real war, not just proxy war. As a result, it is important to explore the potential impact of both on the world oil market, despite the latter being significantly more likely than the former.

US Perspective

Pompeo laid out the Trump administration’s rationale and strategy for dealing with the Islamic Republic in “Confronting Iran,” an article in the November-December 2018 issue of Foreign Affairs. He argued the deal the Obama administration and international community struck with Iran in 2015 – the Joint Comprehensive Plan of Action (JCPOA) – was fundamentally flawed as it failed to end the country’s nuclear weapons ambition. Instead, the deal simply postponed Iran’s nuclear ambitions while the regime continued its ballistic missile program to allow it to deliver a nuclear payload.

At the same time, the deal gave “Tehran piles of money, which the supreme leader has used to sponsor all types of terrorism throughout the Middle East (with few consequences in response) and which have boosted the economic fortunes of a regime that remains bent on exporting its revolution abroad and imposing it at home.”

The core of the Trump administration’s maximum pressure campaign are economic sanctions designed to “choke off revenues” to Iran to force its government to negotiate a “new deal” covering its nuclear activities, ballistic missile program and “malign behaviour” across the Middle East, while providing sufficient military deterrence to keep Tehran from lashing out at US forces and allies in the region.

Trump withdrew the US from the Iran nuclear deal in May 2018, and has since ratcheted up economic sanctions on the Islamic Republic in August and November of last year, while going the full monty on Iranian crude and condensate exports at the beginning of May.

On the deterrence front, the US has moved numerous military assets to the Persian Gulf region since the Trump administration’s “no waiver” oil sanctions came into effect. These include: hastening the arrival of a carrier strike group; deployment of a bomber task-force; additional Patriot missiles; and as reported by The New York Times, drawing up plans to send up to 120,000 US troops to the Middle East, if Iran attacks US forces or rushes to develop nuclear weapons.

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It should be noted that a military buildup of this size would take months, and the 120,000 number is widely viewed as insufficient for a full-scale invasion of Iran. The Islamic Republic has been planning and building up asymmetric military capabilities to thwart a US attack since the 1990s, while the country is larger in size and population than Iraq. The US military plan reported by the New York Times did not call for a land invasion of Iran.

On May 14, Trump denied the New York Times report, but in characteristic fashion appeared to up the ante. “Now, would I do that? Absolutely,” Trump said. “But we have not planned for that. Hopefully we’re not going to have to plan for that. If we did that, we would send a hell of a lot more troops than that.”

But in the Foreign Affairs article Pompeo wrote that Trump does not want the US to go to war with Iran: “President Trump does not want another long-term US military engagement in the Middle East—or in any other region, for that matter. He has spoken openly about the dreadful consequences of the 2003 invasion of Iraq and the 2011 intervention in Libya.”

Iranian Perspective

On May 14, Khamenei explicitly said that Iran does not want to go to war with the US, and suggested the same of America, as a war would be in neither country’s interest.

"There won't be any war,” he said. "Neither we nor they seek war. They know it will not be in their interest."

In terms of Iran’s current situation, David Petraeus, ex-CIA director and America’s former top general in the Middle East, possibly put it best.

"Certainly, if Iran were to precipitate that [a war], it would be a suicide gesture," Petraeus said on May 9. "It would be very, very foolhardy. And they know that."

The Islamic Republic has done an excellent job of marshaling relatively limited financial and military resources to expand its influence and control through the Middle East since 2003, but its defense budget of about US$16 billion – or a mere 3.7 percent of GDP – falls considerably short compared to regional rivals Israel, Saudi Arabia and UAE on an individual basis, let alone a collective one. The military capabilities of the US dwarf those of Iran on every conceivable measure, which should come as no surprise since America’s most recent defense budget is a massive US$686 billion.

Khamenei also said his country has no desire to negotiate with the US, given the Trump administration’s extreme demands and unilateral breaking of the nuclear pact, and suggested the current crisis will likely be a long one, a view supported by Hassan Rouhani, the democratically elected president of Iran.

“The Iranian nation has chosen the path of resistance," Khamenei said.

Rouhani was even more explicit. Speaking to activists from a wide range of political factions on May 12, he said Iran is facing “unprecedented” pressure from US sanctions and suggested economic conditions may become worse than during the 1980-88 Iran-Iraq War.

“The pressures by enemies is a war unprecedented in the history of our Islamic revolution,” Rouhani said, according to the state news agency IRNA.“But I do not despair and have great hope for the future and believe that we can move past these difficult conditions provided that we are united.”

This article was originally published on Oilprice.com