Will Trump go to war with Iran to save America’s oil industry?
It’s believed that a US-Iran war would disrupt the flow of Middle Eastern oil and, as such, should be avoided at all costs. With US oil futures trading in the negative, has the risk of such a war suddenly become attractive?
Last week, nearly a dozen Iranian Islamic Revolutionary Guard Corps Navy (IRGCN) vessels harassed a formation of US Navy and Coast Guard ships operating in international waters in the northern Persian Gulf. According to the US Navy, approximately 11 Iranian fast patrol boats conducted “dangerous and harassing approaches” of a flotilla of six vessels, repeatedly crossing the bows and sterns of the American ships at high speeds.
Such maneuvers are not uncommon in the Persian Gulf, where the US and Iranian navies have faced off against each other several times over the years, employing similar harassing tactics, but always stopping short of actual confrontation.
I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.
— Donald J. Trump (@realDonaldTrump) April 22, 2020
As such, President Donald Trump’s tweet on Wednesday, instructing the US Navy “to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea,” seemed like an unnecessary and dangerous escalation, especially given the history of the US-Iranian confrontation in the region and the potentially devastating consequences of such.
Almost immediately after Trump released his Tweet, the price of oil rebounded. Futures contracts for West Texas Intermediate (WTI) spiked to $13.49, after previously dropping to historic lows, bottoming-out at nearly negative $37. Likewise, Brent futures, which benchmark around 60 percent of global crude purchases, jumped $1.20 higher to $20.53 per barrel, after trading as low as $15.98. Normally the cause-and-effect relationship between the threat of war and the rise in oil prices would be viewed in a negative light. But these are not normal times.
Back in September 2019, a drone and missile attack blamed on Iran—with or without the assistance of Houthi rebels—hit a pair of Saudi Arabian oil facilities, forcing them to shut down and thereby cutting Saudi Arabian oil production by 5.7 million barrels of oil a day, or five percent of global production. This attack came on the heels of a series of explosions targeting oil tankers in the strategic Strait of Hormuz in May 2019, attacks that, again, were blamed on Iran.
Iran has repeatedly sent a message to the US, its Gulf Arab allies and the rest of the world, that if the US expanded its “maximum pressure” campaign by sanctioning Iran’s oil and gas industry, thereby denying Iran access to global markets, then Iran was fully capable of retaliating in kind, closing down the Strait of Hormuz to oil tanker traffic and destroying critical oil production infrastructure. That message was reiterated in the May 2019 attacks – for which Iran, however, never claimed responsibility.
While President Trump’s instincts at the time were to forcefully confront Iran over its behavior, he was talked down by calmer heads within his administration, including senior officers in the US military who warned that the US was not in a position to prevent Iran from exacting a horrific toll on Middle Eastern oil production, and in doing so cripple the global economy. Simply put, the risks associated with a war with Iran far outweighed any potential gains.
That was then; this is now. The Covid-19 pandemic has resulted in a global economic shutdown which has dramatically reduced the demand for oil at a time when the world was witnessing record-high levels of production. The resulting glut has led to a collapse in the price of oil, which has been exacerbated by a price war between Russia and Saudi Arabia, initiated in an effort to drive out US shale oil producers and lock in their respective share of a shrinking market.
The Russians and Saudis were successful—too successful. With US oil continuing to be produced at record rates, contributing to a global excess production amounting to some 27 million barrels per day, the US and the world are rapidly running out of places to store the resulting glut. This has led to a crisis where the price of Western Texas Intermediate, the benchmark index for US oil, moved into negative numbers as oil traders were compelled to pay customers to take possession of oil contracts for May. A similar fate awaits June WTI contracts and, unless the global overproduction of oil ceases, this is a model that will repeat itself. Already, US producers are going into bankruptcy, triggering an economic collapse that threatens to take down a considerable portion of the US oil industry.
The only way out of this economic disaster is for the world to cut back on oil production. Talks between the major oil producers earlier this month produced planned cuts of around 10 million barrels per day, leaving some 17 million barrels in daily overproduction. While there are talks about instituting additional cuts, no nation wants to sacrifice market share in order to save US shale oil, which many nations blame for much of the overproduction taking place today.
There is one way, however, to instantly remove more than 20 million barrels a day from the global economy—a war with Iran that closes the Strait of Hormuz and shuts down oil production in the Persian Gulf region. Back in 2019, this very outcome is what mitigated against a military conflict between the US and Iran. Today, with the US oil industry in crisis and facing potentially irreversible losses, a Middle Eastern war suddenly makes perfect sense.
Back in 2019, the US was ill-prepared for a war with Iran. In the intervening time, it has bolstered its defenses and strengthened its military presence in the Persian Gulf region to the point that, at a minimum, it can provide a modicum of protection to deployed forces while simultaneously being able to launch damaging attacks against Iran. The extent to which the US can shield its Gulf Arab allies from any Iranian counterattack is uncertain and, more to the point, irrelevant. While the US has deployed Patriot surface-to-air missile batteries to Saudi Arabia to protect critical oil infrastructure, there is little doubt that Iran would exact a terrible toll on the oil production capacity of Saudi Arabia and the other Gulf Arab states.
The consequences of such a military confrontation would be dire and immediate, with more than 21 million barrels of oil removed from the global market instantaneously, and oil prices soaring—precisely the outcome needed to save US oil producers. Whether such a war actually comes to pass has yet to be seen, but one thing is for certain—the risk-gain analysis that held that a war with Iran would be prohibitively expensive has been flipped on its head. The fact of the matter is that a US war with Iran might be the only thing that can save US oil. In a Presidential election year where Trump is desperately looking to prop up the US economy, war suddenly has become very attractive.