Who’s Going To Fold First In The U.S.–Iran High Stakes Game?

As in all poker games, the player with the deepest pockets will ultimately win if he is prepared to stay at the table, and so with the high-stakes game of the U.S.-Iran War. The contents of a confidential CIA report relayed last week assessed that Iran can endure the current U.S. naval blockade in and around the Strait of Hormuz and Persian Gulf for at least 90 to 120 days, but after that it would face economic collapse. Meanwhile, the U.S. continues to benefit from dramatically increased oil production and prices on the higher historical side, with the only downside for President Donald Trump being higher gasoline prices, but these are manipulable back down to more publicly acceptable levels before the November mid-term elections if needs be. Mercurial he may be, but stupid he is not, which is why Washington has largely declined to rise to the bait of further attacks against its naval assets in the Strait, as orchestrated by the hardline Islamic Revolutionary Guard Corps. However, when a peace deal is reached between the U.S. and Iran, what will it look like? As it stands in the rotation of play, Tehran has indicated that the most recent U.S. 14-Point Peace Proposal is unacceptable, and Trump has done the same for Iran’s counter-proposal. The basis of the U.S. position is likely to remain very close to the original tougher version of former President Barack Obama’s ‘Joint Comprehensive Plan of Action’ (JCPOA, or colloquially ‘the nuclear deal’), a senior Washington-based legal source who works closely with the U.S. Treasury exclusively told OilPrice.com last week. That version was ultimately softened due to pressure from France and Germany before the final version was agreed on 14 July 2015, as analysed in full in my latest book on the new global oil market order. According to the source, it was always this hardline Obama version that Trump sought to enforce, and his withdrawal of the U.S. from the JCPOA in May 2018 was intended to bring Iran back to the table under those tougher terms. There have been some changes to the original Obama version, focused on preventing Iran from being able to build a nuclear weapon, as was the key premise for the launch of the U.S./Israel-Iran War on 28 February. This has shifted in recent days from Iran never being allowed to enrich uranium and handing over all such material in stock (roughly 440kg of 60% enriched material) to an independent body. Washington now wants Iran to halt all uranium enrichment for a minimum of 12 to 15 years, although the demand for it to hand over its already enriched material remains in place. Iran, on the other hand, continues to assert that uranium enrichment is a ‘sovereign right’ under the Nuclear Non-Proliferation Treaty (NPT), rejecting any permanent ban, but again in recent days it has counter-offered a five-year suspension. Its Foreign Ministry has also stated that its enriched uranium ‘will not be transferred anywhere outside Iran’, but it has offered to dilute its stockpile down to lower, non-weapons-grade levels under the supervision of the International Atomic Energy Agency (IAEA). This would make it useless for the quick ‘breakout’ to a nuclear weapon. The main concession the U.S. is continuing to offer in return is the phased lifting of sanctions on Iran, and the graduated release of billions of dollars’ worth of Tehran’s frozen assets. Again, this echoes the same ideas as both the harder and softer versions of Obama’s JCPOA versions. The agreed JCPOA of 2015 saw sanctions lifted in stages over a longer timeline, but the deal did quickly unblock around US$50-100 billion in Iranian oil revenue that was stuck in foreign banks. The current Trump proposal has a similarly graduated lifting of sanctions, beginning after Iranian-imposed restrictions on shipping through the Strait of Hormuz are lifted. But the unblocking of frozen assets would be staged over a longer period, and linked to verifiable progress made by Iran on key issues, most notably the handover of its enriched uranium stockpile. This is expected to release between US$20-25 billion in stages, with further talks down the line on releasing more. For its part, Iran — and one of its key officials, Speaker of Parliament, Mohammad Bagher Qalibaf — have demanded at least US$120 billion in assets to be released before further serious negotiations can begin. Unlike the 2015 JCPOA, whose ‘snapback mechanism’ to reimpose United Nations (UN) sanctions took weeks to reimpose, Trump’s administration has included a ‘finger on the trigger’ in its 14-Point Proposal that allows the U.S. to immediately resume military action (including the Strait of Hormuz/Persian Gulf blockade) without needing to go through the UN if the subsequent negotiations collapse. That said, Trump is never likely to fully relinquish the U.S.’s ability to control the vital Strait of Hormuz/Persian Gulf transit route again, according to the Washington-based source. As analysed recently by OilPrice.com, this is in large part a function of Washington’s desire to deny China the control over key global transit routes that it enjoyed before the current U.S.-Iran conflict. This was borne of necessity on Beijing’s part, as it needs to ensure free movement of the oil and gas supplies that it needs to power its economic growth, and in which it is deficient. To secure this access, China has spent years building its influence over key energy hubs in the Middle East through the mechanism of its ‘Belt and Road Initiative’, as also fully detailed in my latest book on the new global oil market order. Comprehensive cooperation agreements based on this template have been struck with numerous Middle Eastern powers — including Iran — to secure access to oil and gas fields in exchange for vast Chinese investments, often involving huge loans from Beijing secured against key strategic assets. One of the most significant of these global transit points remains the Strait of Hormuz, through which up to 30% of the world’s oil is transported and about 20% of its liquefied natural gas (LNG). Another is the Bab al-Mandab Strait, host to 10-15% of the world’s seaborne oil shipments, and also under the effective control of Iran through its Yemen-based Houthi proxies. As recent events have shown, control over these two critical arteries of global energy trade confers immense geopolitical leverage on whichever country holds it. Understandably from the U.S. position, it cannot be Iran that does so on the ground, with China pulling the strings behind the scenes. This effort by the U.S. to secure key global pressure points at China’s expense also includes the Greenland–Iceland–UK Gap, the Panama Canal, and the U.S.–Indonesia ‘Major Defense Cooperation Partnership (MDCP)’ signed on 13 April. As highlighted by Macquarie Group’s New York-based global FX and rates strategist, Thierry Wizman, the latter of these initiatives grants Washington enhanced monitoring and contingency-operation rights over the Strait of Malacca and the South China Sea. He adds that the U.S.–Morocco ‘2026–2036 Defense Cooperation Roadmap’ formalised long-term U.S. access to Moroccan facilities for logistics, training, and operational coordination, providing Washington with a reliable contingent foothold on the Strait of Gibraltar. A potential sticking point for Trump in continuing the blockade of the Strait of Hormuz/Persian Gulf has been concerns over the economic, and resulting political, effects of high oil prices on the price of gasoline. Historical data highlights that every US$10 per barrel change in the oil price results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent per gallon that the average price of gasoline rises, more than US$1 billion or so per year in consumer spending is lost — causing economic damage, as further analysed in my latest book. Politically, since 1896, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only once out of seven occasions. Trump may not ultimately seek another term as President, but he does not want his political legacy to be defined by a failed Iran adventure, as he believes Jimmy Carter’s was. The Republican Party will also want to optimise their chances for another of their members to be in the top job, which means keeping gasoline prices — and therefore, oil prices — at the low end of historical averages. However, a potential remedy to this is available to Trump if required, in that he could order export controls on U.S. crude, including the 2-3 million barrels per day of extra production recorded since February. The authority for him to do this lies in the ‘Consolidated Appropriations Act, 2016’, which gives the President authority to impose export restrictions for up to one year in a national emergency or for national security purposes. Given these factors, there is little need for Trump to make any concessions to Iran any time soon. By Simon Watkins for Oilprice.com More Top Reads From Oilprice.com