Butterfly effect

Election Year: Best Response Strategy for Obama

The escalation of the Iranian nuclear standoff this year with Western sanctions and the threat of an Israeli preemptive strike on Iranian nuclear facilities. Amid the politics and rhetoric it is interesting to see how the United States’ collective action with the EU to impose an embargo on Iranian has put it in a reactionary role to Israeli foreign policy.

Wanting to gain a deeper understanding of the perspectives of Turkey and Israel in this standoff, I recently reached out to Bloomberg Op-Ed Efrain Inbar, Soli Ozel and Dmitry Trenin to get a feel for the ways in which this crisis can be resolved. It is interesting to see here two contrasting views on how to deal with Iran. Whereas the United States has looked at preventing Iran obtaining nuclear weapons in the absolute, the Russian and Turkish approach has been based on the idea that Iran will eventually obtain a nuclear weapon no matter how many setbacks they face and hence it is better to integrate into the global community as opposed to shutting it out. Israel on the other hand has had a history of covert strikes against nuclear programs, with one on Iraq in 1981 and more recently in Syria back in 2007. Clearly Israel has shown its propensity to preemptively remove threats from its hemisphere of influence before. The Israeli mentality towards a strike on Iran is not so much a question of whether or not to strike, but at what cost to strike. It would appear that risk calculus has now tipped in favor of a preemptive strike. All this puts the United States and particularly president Obama in a tight spot given that its election year.

Though Obama has gained some political capital with the killing of Bin Laden in 2011, the more than decade long U.S. military involvement in Iraq and Afghanistan is not far from the voter’s mind. Having pulled troops out of Iraq last year, the prospect of another U.S. Middle East conflict causing more U.S. spending and costing U.S. lives is not something most voters would like to deal with. Yet on the other hand, the incumbent President is also at risk of appearing soft on U.S. foreign policy in front of Republican attack. Obama is thus truly between a rock and a hard place in terms of the Iranian nuclear standoff. He must appear strong in U.S. policy denouncing Iranian nuclear ambitions, yet also not go far enough to give some illusion to Israel that U.S. would launch a joint effort to preemptively strike Iran.

Israel Calling The Shots

Given Obama’s predicament, it would appear that the U.S. for the time being has switched to a reactionary posture towards Israeli foreign policy. Israel could be argued to be the lynch-pin in this entire situation.

Let us conduct a little thought experiment here on how this chess game will unfold should Israel attack. A preemptive strike whether successful or not would likely prompt Iranian retaliation as a means of saving face, but also the closure of the Strait of Hormuz (again to follow through on the bluff). An Iranian counterattack would most likely materialize in the form of long range missile bombardment, Israel’s response is really anyone’s guess. But more importantly though, an Iranian closure of the Strait of Hormuz would more than likely draw the United States into direct contact with Iranian forces on the premise of global energy security.

If we go back in history, the ‘Tanker Wars’ of the Iran-Iraq conflict drew the Soviet Union and the United States into an escort role in the Persian Gulf. Given the structural change (Chinese demand) in global energy demand these days, it would appear that the United States would be even more inclined to protect a vital waterway for the world’s crude oil supply. Nonetheless, a direct confrontation would be won by the United States, but at what cost?

Impact On Oil Markets

Though the collapse of the Soviet Union has enabled the development of large reserves in the Central Asian countries of Kazakhstan, Azerbaijan and Turkmenistan, oil from the Gulf Region still represents a sizable portion of global daily demand. In 2011, an average of 14 tankers carrying 17 million barrels per day passed through the Strait of Hormuz. That’s a huge amount of oil that would be removed from the global markets! The bigger issue today with oil trading is the rise of paper and electronic trading, which has made oil a truly fungible commodity. Thus, the rise of global oil markets has also brought about the risk of market overreaction to supply disruptions, as we saw in 2008. Thus any such disruptions in supply would be reflected in a dramatic increase in spot prices. With that being said it is most likely we see Dubai Crude exhibit pricing deviations with Brent and WTI prices.

Though the U.S. Strategic Petroleum Reserve has the ability to some extent ease prices, the dual impact of high oil prices in a weak U.S. economy and the uncertainties of the duration of a U.S. conflict with Iran do not bode well for the incumbent President in election year. It is extremely fascinating to see how minor action could have such wide reaching effects around the world.