On February 28th, the U.S. and Israel started to bomb targets across Iran, ending weeks of gunboat diplomacy. The purpose of the strike was and still is unclear, varying from regime change to taking out ballistic missiles and end Iran’s nuclear arms program (even though Mr. Trump stated in June of last year that Iran’s nuclear capabilities were “obliterated”). Ayatollah Ali Khamenei, Iran’s supreme leader, and other high-ranked officials were killed within a day. An enthusiastic Mr. Trump urged Iranians “to take over your government” whilst in the meantime looking for a “Iranian Delcy”, although he quickly realized that some of his short-listed candidates did not survive the air raids (in a later strike, Iran’s security chief Ali Larijani was also killed by Israel, thereby deliberately ensuring that there is nobody left to negotiate with). Anyway, asking Iranians to take to the streets while it is raining bombs is not a very enticing proposal. In the meantime, Mojtaba Khamenei, son of Ali Khamenei, was elected as supreme leader but hasn’t been seen alive (according to unverified sources, he is undergoing surgery in Russia).
It seems that the U.S. engaged in the war (or “excursion” as Mr. Trump calls it) without proper planning and scenario analysis. Apparently, the Pentagon did not anticipate Iran’s response to close off the Strait of Hormuz (which is rather odd, to say the least). Neither did it anticipate Iran’s bombing of not only American military bases in the region but also civilian targets, like airports, hotels and oil refineries. But when regime survival is at stake, you should expect that all stops are pulled out: a scorched earth response from Iran should not have been a surprise, in our view. The economic damage to the Gulf states (especially in the UAE, i.e. Dubai) will be very high. Higher oil and gas prices (many companies already declared force majeure) and supply shortages of fertilizer, sulfur and helium will be felt across the globe, especially in Asia (where some countries will also suffer from lower remittances by workers in the Middle East) and Europe. Given that about 20 million barrels of oil per day are now removed from the market (or 20% of global oil exports), economic growth will slow down and inflation is likely to increase (which in the U.S. is further boosted by increasing fiscal incontinence), although this is a function of how long the war (sorry, “little excursion”) will last. The war will also hurt Iran economically, but the country can still sell oil to China, assuming America will refrain from bombing Chinese tankers, thereby further escalating the conflict.
Queuing for fuel …
Apart from non-Middle East oil and gas companies, the only one who is spinning yarns under the current situation is Vladimir Putin. He now can sell his oil for higher prices, resulting in extra government revenues of an estimated USD 6.5 billion per month. Trump even allows Russia to resume selling oil to India. Meanwhile, Putin is helping his Iranian friends with military intelligence to identify (American) targets in the region, whereas the U.S. military is wasting Patriot inceptors that now can not be sold anymore to Ukraine.
Mr. Trump started an illegal war (according to international law as there is no clear and present danger that Iran would attack either the U.S. or Israel; indeed, Iran still was negotiating details of a deal, maybe in bad faith, with Messrs. Witkoff and Kushner), without asking U.S. Congress for permission or informing and consulting its present (or former!) allies in the Middle East and Europe. Although the aerial raids may be considered a success (Mr. Trump boasts that the war is very complete), oil is not flowing through the Strait. Trump asked European countries (accompanied by Trump’s signature threats) and China to send warships to escort oil and LNG tankers. But they politely refused to become sitting ducks in a war that is not theirs (even though they bear the brunt of Trump’s follies). Trump could “obliterate” the oil export terminals at Kharg Island instead but that will cause an environmental disaster. And Iran could encourage the Houthis in Yemen to fire missiles at ships in the Red Sea in response.
Clearly, the pressure is on Trump to end the war quickly. But this is not in his gift, he doesn’t hold the cards. Despite being weakened, Iran may continue to be a persistent threat given its arsenal of Shahed drones with which it can target ships in the Strait of Hormuz and targets on the Arabian Peninsula (for example, bombing water desalination plants which would create enormous chaos). Iran’s leadership is significantly decimated but for now it seems not likely that the Islamic Revolutionary Guard will relinquish control anytime soon. American boots on the ground is not (yet) on the menu and Trump’s idea to arm Iranian Kurdish factions instead is extremely dangerous with a civil war along ethnic lines a likely outcome (fortunately, he has gone quiet on this). So, that leaves diplomacy as a last resort but killing Mr. Larijani, who effectively was running the Islamic Republic and could be amenable to a peace deal, has made this route more difficult (thank you, Mr. Netanyahu!). In any case, even Iranian moderates may conclude that talking with the erratic and unreliable president of the United States may be a waste of time, given that their country was attacked whilst negotiations were still under way.
Whatever the outcome of this war, we can safely say that Donald Trump is not a Winston Churchill …