Iran

Arms control and diplomacy are falling by the wayside as countries modernize arsenals and renew their focus on geopolitical competition.

The United States launched cyber strikes against Iran; APT-10 suspected of cyberattack on global telecoms; Singapore invests in 5G; continued U.S. crackdown on Chinese technology companies; Chinese government and companies push back

As tensions between the United States and Iran increase, questions of conflict prevention and response loom large. 

The Democratic field could touch on a number of foreign policy issues, from climate change to Iran, during its first prime-time sparring session.

I woke up this morning thinking I would write a blog explaining just how challenging it would be for Iran to close the Strait of Hormuz for a prolonged period of time. This is not to say that there could not be a battle in the waterway: Iran has lots of conventional weapons, including mines, submarines, a large fleet of speed boats (think the USS Cole bombing), torpedoes, and missile batteries. But I thought to myself, why would Iran want to give the U.S. military the rationale to target Tehran’s largest military assets and destroy them? Then I saw a news report that a short range Katyusha missile hit a site very close to ExxonMobil’s operations center in southern Iraq, near the Zubair oil field, where Italian oil firm ENI is helping restore production capacity. Royal Dutch Shell also has personnel in the area. That brought me back to my father-in-law’s favorite expression “Too clever by a half.” For those of you who don’t know that term, the internet defines it as meaning “annoyingly proud of one’s intelligence or skill and in danger of overreaching oneself.” I don’t think that definition, though accurate, does the phrase justice. The formal definition doesn’t fully convey the high level of arrogance and stupidity involved when someone makes an incredibly large mistake because they think they are outsmarting someone when in reality they are about to create a huge disaster for themselves. Now you could be wondering: Am I talking about Iran or the United States? Let’s talk about both. Iran is so used to working through proxies with no consequences on its ruling elite or its physical motherland that it believes that it can offer these endless, faceless “sabotage” operations with impunity.  On the flip side, the United States is used to stationing an aircraft carrier somewhere and believing that it is a solution to small-scale attacks (e.g. weaker party doesn’t want an actual military engagement so they back down). This, however, fails to recognize that force projection in the age of asymmetric warfare may not be the most effective deterrent. It begs the question of “proportional” response. Iran is hoping for that messy debate. That is why it appears that Iran could be selecting discrete high-value targets with methods that are hard to fingerprint.  That brings me back to Iran’s original threat, when the United States announced it was withdrawing from the Joint Comprehensive Plan of Action (JCPA) nuclear deal and reimposing sanctions on Iranian oil exports. Iranian President Hassan Rouhani said “If one day they [America] want to prevent the export of Iran’s oil, then no oil will be exported from the Persian Gulf.” And that brings me to my favorite parenting advice for raising a two-year old. Don’t threaten something if you don’t intend to carry it through. As the United States considers the uncomfortable decision on how to convey diplomatically or, in the worst case, militarily that continued attacks on oil installations across the Persian Gulf will not be tolerated, it needs to acknowledge that Iran has many ways to harass oil exports to the international market. As I wrote previously, referring to all these efforts as “sabotage” underplays their significance. The inventory of oil attack events to date is starting to be extensive. It includes attacks on shipping via missiles from Yemen, attacks via missiles in Iraq, attacks on oil and petrochemical feedstock shipping with limpet mines, attacks on regional oil facilities using drones, notably in Saudi Arabia, several major cyber incursions against the Saudi oil and petrochemical industry, and sabotage activities that led to explosions on oil pipelines across the region, notably in Bahrain. Then there is the possibility that the contamination of oil coming from Russia to Europe was more malicious than it appeared. I have written a book with economist Mahmoud El-Gamal on the close linkages between the seminal business cycle, the oil price cycle, and Middle East geopolitical violence. We updated that work in a journal article that highlights how the more lasting impact of war-related damage to oil facilities is endemic to lasting oil price volatility. The problem for both the United States and Iran is that the global rules of engagement for asymmetrical attacks on energy facilities are extremely unclear. If the United States hits Iran with traditional fire power against Iranian military targets to deter further conventional attacks on oil exports, will that address the cyber domain or not? Does cyber have to address cyber? The patterns of engagement are unclear and that is dangerous for all concerned. That lack of clarity raises the stakes of a miscalculation, especially on the Iranian side. The anonymous declaration this week in the New York Times that the United States military is stepping up its digital incursions to Russia’s electric power grid highlights the challenge of deterrence. Iranian cyber incursions into U.S. infrastructure date back many years. There is a tendency among geopolitical commentators to dismiss the usefulness of diplomacy in stale conflicts. One often hears talk that there is little possibility for a reset of the Iran nuclear deal, hence no point to dialogue between the United States and Iran either directly or through intermediaries. This is clearly incorrect. The problem with that logic is that diplomacy is often needed so countries do not misunderstand the progression of events that could result from a string of ambiguous situations. In the case of asymmetric attacks on energy, diplomacy is sorely needed to define those ambiguities and bring transparency to what constitutes a clear and present danger.   

The narrow and congested Mideast waterway has become a site of escalating U.S.-Iran tensions. Conflict in the wake of tanker attacks there could jolt global oil supplies.

The Trump administration's pressure on Iran has created an opening for diplomacy.

The decision by the United States to wind down waivers on U.S. sanctions against Iranian oil exports has laid bare some new realities about oil geopolitics that were previously not well understood. Oil supply shortages --regardless of whether they are orchestrated by the Organization of Petroleum Exporting Countries (OPEC) or come about from sabotage of oil facilities or escalating military conflicts in the Middle East-- are more China’s problem than the United States’ worry. President Trump muddied the waters of that perception by simultaneously bragging about U.S. freedom molecules (e.g. U.S. oil and gas exports), but then constantly jawboning OPEC to keep oil supplies high. No doubt Americans care about gasoline prices and don’t stomach petro-blackmail well, but everyone from Iran’s Supreme Leader Ayatollah Ali Khamenei to Wall Street hedge fund strategists are focused on how President Trump cannot afford let U.S. gasoline prices rise in an election year, and they are missing the forest for the trees. It is the Chinese economy, not the U.S. economy, that stands to lose the most from oil supply cutoffs. China’s oil imports have been rising and hit over 10.6 million barrels a day in April as the country’s refiners built up stockpiles ahead of expected disruptions from Iran and Venezuela. That begs the geopolitical question: Who does Beijing consider a reliable energy supplier and can they afford to skip U.S. oil and gas exports? If you are President Trump, you are probably thinking the answer to the second part of that question is no, especially since you are cutting off supplies from Iran. To address the reliability issue, let’s take a tour of Chinese suppliers. Saudi Arabia has been quietly shifting oil from the United States, where imports from the desert kingdom are nearing low levels not seen since the mid-1980s, to China where it is now the largest supplier to the Asian giant. But China has to worry about Saudi production cuts as part of future OPEC agreements as well as attacks on Saudi oil infrastructure.   Igor Sechin, head of Rosneft, told the St. Petersburg International Economic Forum this week that China and Russia should increase their oil trade. The statement coincided with bilateral meetings between Russian President Vladimir Putin and Chinese leader Xi Jiping in Moscow.  But Chinese investments in Russian oil firms have run afoul in recent years and the massive contamination of oil supplies shipped via the Druzhba pipeline to Europe is raising questions about Russia’s reliability as an energy supplier. China’s $160 plus billion in investments in foreign oil fields to garner secure equity crude oil supply in rogue petro-states has not panned out well. Several oil states have defaulted on Chinese loans or failed to deliver the promised oil. Most recently, oil payments by Venezuela to cover its $60 billion in borrowing from Beijing has fallen by the wayside as the country’s oil production has collapsed. Prolonged civil wars in Sudan and South Sudan have severely restricted the amount of oil Chinese companies could extract. Now with U.S. sanctions, oil shipments from Iran are in question. Angola, another important Chinese supplier, could see its production plummet by a third in the next few years if it cannot shore up investment. All this puts more importance on other Middle East supplies, which could face increased geopolitical risk if the escalating conflict between Iran and Saudi Arabia leads to additional sabotage against Persian Gulf shipping and production. Iraq, Kuwait and the United Arab Emirates are major suppliers to China. When the trade war with the United States worsened last year, Chinese firms curtailed spot market purchases of U.S. crude oil. It remains to be seen what the long run ramifications of less transitory, more structural worsening of U.S.-China relations would mean for energy ties. Presumably, China would intuitively feel relying on U.S. oil supplies would be strategically risky. And then, there is just the worry that the Gulf of Mexico hurricane season or a rapid downward spiral in oil prices could mean U.S. oil exports levels suddenly sink. All this leads back to the main point. China, which has no real experience in jawboning OPEC for more supply because it was energy self-sufficient in 1973, and even in 1990 when Iraq invaded Kuwait, has not grappled yet with this new reality. To date, China’s complaints have focused on complaining about U.S. policies towards Iran. That belies the fact that China is freeriding off the U.S. President making statements about the need for adequate supplies from OPEC to keep the global economy from slowing down. Moreover, the United States is accommodating China by making those statements, even as Washington cuts off access to Iranian oil. That raises an important question: when (and in the future, if) Saudi Arabia and Russia fail to respond to U.S. appeals to put more oil in the global market, are they secretly, or at least inadvertently, attacking China? It is a question that bears asking in Beijing. Even if Russia and Saudi Arabia have offered China extra oil in recent weeks, if that oil is just coming from elsewhere in the market (e.g. commodity shuffling) and doesn’t reflect added barrels, as is currently the case, the bill could someday be sent to Chinese consumers in the form of higher oil prices and a shrinking trade surplus.

Neither Iran nor the United States likely wants war, but the possibility of a miscommunication is considerable, risking a dangerous escalation.

With significant risks now looming over global energy markets, the United States should be careful in evaluating any future oil sanctions, Amy Myers Jaffe writes in the following Q & A which first appeared on CFR.org.  Oil prices ticked up a few percentage points after the announcement. Do you expect prices to remain higher, or is there enough supply in the market to cover a drop in Iranian exports? U.S. sanctions had already curbed Iran’s oil production substantially earlier this year. The Trump administration’s tough stand on waivers could remove an additional five hundred thousand barrels per day or more from the market in the coming weeks. This would come on top of production cuts planned by the Organization of the Petroleum Exporting Countries (OPEC) and ongoing production and export problems in Libya and Venezuela. Oil prices will continue to be sensitive to any supply disruptions, despite expectations of rising U.S. oil production and possible production increases from Saudi Arabia. Should prices begin to rise precipitously, the Trump administration could make sales from the United States’ strategic petroleum reserve. How has the United States’ growing role as a major crude oil exporter changed its attitudes when it comes to sanctions?  There is no question that rising U.S. oil production has emboldened U.S. policy regarding oil sanctions. U.S. crude oil exports reached record levels, above 2.5 million barrels per day, in recent weeks and are expected to rise further this year. However, the administration should take care not to impose too many complex sanctions in the oil market at once because surprise events such as hurricanes, accidents at major oil fields, or geopolitical strife can create sudden disruptions in oil supplies and leave markets more vulnerable to price spikes. U.S. crude oil production is still less than 12 percent of the total global crude oil supply. It can only go so far in hedging against the multiple risks now looming in the market. Iran has threatened to stop the flow of oil from other big suppliers via the Strait of Hormuz. Could it do that? How exposed is the U.S. economy to oil disruptions in the Middle East? The Strait of Hormuz is more than twenty miles wide. It would be extremely difficult for Iran to close it completely for an extended period of time. There is the question of whether Iran could use asymmetric warfare tactics, such as swarming speedboats and missile attacks, but the possibility of a decisive international military response led by the United States makes such an endeavor extremely risky for Iran and its military. Iran would likely use more clandestine approaches, such as cyberattacks on neighboring state oil facilities. Saudi Arabia and the United Arab Emirates have alternative pipeline routes that can bypass the Strait of Hormuz. In the case of Saudi Arabia, upward of 6.5 million barrels per day in exports could bypass the Persian Gulf. The U.S. economy is less exposed now to oil price shocks than in past decades due to the lower oil intensity of the U.S. economy. Still, high gasoline prices can derail consumer spending, especially on durable goods such as cars. At the same time, an oil price shock in the developing world could cut into countries’ appetites for U.S. goods and services. China is the largest purchaser of Iranian crude. How do you expect it to respond to the Trump administration’s decision? China said that Iran’s discounted oil was too cheap to pass up, and it has been increasing its purchases of Iranian crude in 2019, reaching over seven hundred thousand barrels per day this month. In the past, China attempted to circumvent these sanctions by purchasing Iranian crude on a barter basis or by promising to pay Tehran once sanctions are lifted. In the end, the United States and China have many bilateral issues of greater salience, so both sides will be reluctant to fight over Iran policy. What will this additional pressure on Iran achieve? Iran has little incentive at this point to negotiate with the Trump administration so close to the U.S. presidential election cycle. Iran has a policy it calls strategic patience, which is simply waiting to see if a new administration might reinstate the Iran nuclear agreement or take a less aggressive posture. The International Atomic Energy Agency maintains that Iran has continued to comply with nuclear inspections set up by the deal, which is still being honored by European signatories.

With significant risks now looming over global energy markets, the United States should be careful not to go too far with oil sanctions.