2013: Let The Oil Carnage Begin ( 2 )

But rather than despairing about a high price environment, the U.S. should turn it into an advantage. The first move is outlining to Americans that there is no reason why gasoline prices should always cost less than $4 a gallon, especially when Washington is trying to pursue broader foreign policy goals in the Middle East. Get that straight, and the second, associated move, once prices rise above $120/b, is to make very clear that under no circumstance will the Strategic Reserve be used on a hard pressed Iran.
That obviously requires getting the Saudis on-board to hold back on supplies to let prices shift towards $150/b – not with a view of testing how elastic oil demand is – but with the single aim of getting Asian consumers on-board to join Iranian sanctions. If the Saudis (and IEA) refuse to quell a stampeding market by enhancing output, the security of supply and price implications will be more than enough to attract Chinese, Indian, South Korean and Japanese attention as the mainstay of Persian petroleum outlets. Beijing sources over half of its 5.5mb/d imports from Gulf States, the vast bulk of which comes from Arab states, compared to a fluctuating 500,000-750,000b/d Persian off-take. Washington’s road to Beijing to co-operate on sanctions therefore runs directly through Riyadh. If China’s core suppliers in the Gulf call time on Iranian nuclear ambitions, Beijing (and Delhi) would comply accordingly, either to exert serious diplomatic pressure on Iran to change course, or sever all oil ties. Iran would literally have no significant hydrocarbon outlets; its oil receipts would grind to an alarmingly abrupt halt. Tehran would have to book a seat at the negotiation table.
Default Position: Price Pressures Require Diplomatic Strategy
If that outlines two ‘bipolar’ scenarios for how sanctions might actually work – namely loosening them at the bottom of the market to deflate prices into Asian markets plunging Iran into deep economic chaos – or conversely choking off prospective Asian outlets in a very high price environment by forcing Eastern consumers to adhere to Gulf State interests, neither are any use without a diplomatic position in place to capitalise on the economic brinkmanship entailed. Getting Iran to the political table is one thing, persuading them to sign a nuclear deal is quite another.
For all the chatter around P5+1 diplomacy (Britain, France, Germany, Russia, America and China) the only two countries that actually matter here are the U.S. and China. The rest can frankly stay at home. Under any scenario you care to imagine, without Beijing on-board as the vital outlet for Iranian crude, little, if no progress will be made.
Obviously, one of the two scenarios outlined here could help to nudge China in that direction. But Beijing is also well aware that the costs of not going down the sanctions path are getting higher. The closer Iran inches towards its nuclear end game, the far more likely it becomes one of the players involved makes a rash move. If U.S. and Chinese interests align, the unfortunate acronym entailed reads ‘CACC’ – the ‘Chinese American Co-operation Council’ for the Middle East, but this can’t just be about a meeting of minds, but political sacrifices in Washington to give such a body credibility. The U.S. can’t just position sanctions to bring China into the fold; they need to give Beijing the joint lead in any subsequent negotiations. In no way can this be seen to be an international climb down for Iran; it has to be sold as a mutually beneficial deal. That would entail close controls and inspections over what Iran could do in the nuclear field, with the quid pro quo of enhancing Iran’s global energy stake and recognising its growing regional political stature. China basically cushions the Persian blow as a new, ‘inclusive’ form of international diplomacy.
Translate that into security terms, Washington has to promote Beijing as credible provider, not consummate consumer of geopolitical stability if it wants energy supplies to consistently pan out. That looks a pretty forlorn hope right now given American ‘hard balancing’ of Chinese interests in Asia, both sides need to dump such folly and focus on external security vacuums growing at alarming pace in the Middle East. Failure to agree on a shared division of geopolitical (G2) labour in the Gulf could be very costly, particularly as the Saudi-Iran relationship sits at the heart of U.S.-Chinese relations as currently configured. Should the Iranian situation spiral out of control, the U.S. will act, irrespective of the fiscal damage that’s likely to inflict on the American economy. China would see this as last ditch power play by Washington to secure its place in the sand, albeit with the deep (very deep) irony that Beijing will ultimately be bank rolling such an effort through (in)direct financing of American printing presses.
Very Short On Political Time
With the stakes that high, time is horribly short to get the sanctions strategy right and diplomatic ducks lined up. The further both components continue to drift, the more likely we end up with explosive outcomes across the Iranian board. At this stage, it’s not Iranian politics that’s the concern, but that America only has one year (at most) to adopt the kind of serious sanctions strategy outlined here to forge a negotiated settlement. The sad fact is that America will probably fall prey to its own political cycle rather taking truly economically aggressive moves needed to force Iran’s hand. Unless rapid progress is made into 2013, there’s no way the White House will have the political space required to loosen Iranian sanctions in a low price environment, let alone driving markets towards $150/b to bring Asia on-board with American mid-terms slated for in 2014, followed by the two years of campaigning for Presidential elections in 2016.
‘Economic difficulty’ will be continue to be misread as pending ‘economic implosion’ in Iran, with ‘middle of the road’ sanctions doing little more than biding time for the growing clarion call for pre-emptive military strikes against Tehran as the default option to stop the nuclear clock towards 2015. Rest assured if that’s where we end up, the costs of war will far outstrip any of the collateral damage involved in piecing together a serious sanctions approach in 2013. Once American military hardware comes into play, the Iranian’s will block the Strait of Hormuz to derail the global economy, they’ll consider strikes on key Saudi production / refining facilities at Abqaiq and Ras Tanura. But far more importantly, they’ll ensure that the Middle East burns by stoking Shia tensions across the region. That applies to Bahrain, Syria, Lebanon and indeed Iraq and Saudi Arabia’s Eastern Province. Oil markets will suffer for years to come. Middle East frictions laid entirely bare.
So as controversial as the sanctions options presented here are for those who don’t want to take economic pressures to their logical conclusions, once we get beyond 2013, we’re merely drifting towards military actions against Tehran. The downside risks that presents are enormous. The Middle East will be scorched; the friction across international corridors of power, untold. It’s either that, or policy makers start considering that living with a nuclear Iran, although unpalatable, might be a better option than playing Russian roulette with the Middle East. Given its ‘Nobel Prize’ status, Europe will be first to float the idea, but depending on what answers that yields in Riyadh and Beijing, Washington and Tel Aviv would be wise to at least consider the response before taking things further. No good policy options are in play here, it’s merely a case of picking the least worse.
Whatever decisions are finally made, not only should all sanctions options be tried first to push Iran into a negotiation corner, but any military escalation needs to be discussed on an international basis having weighed up all the relative costs. If nothing else, Goldman’s would have good cause to be bullish on oil this time round. War, rather like international policy making, has an awkward habit of drifting and dragging on far beyond folks’ initially limited imaginations, often to little (positive) effect.
source: forbes.com
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