Last night Donald Trump rehashed his arguments for war with Iran. It didn’t go well. His vague promise of an end to the war in a few weeks caused oil prices to rise and the stock market to fall. He claimed the strait of Hormuz would open naturally, because Iran will want to get its oil out.
That is bogus. The strait isn’t closed to Iran’s oil. Tehran is already shipping at will. Trump also appealed to others to re-open the strait, because the US doesn’t get oil that passes through it. That’s bogus too. The quantity of oil passing through the strait determines world oil prices. The price you see at the pump doesn’t increase because the pump has oil that came through the strait.
It is true that the war has degraded Tehran’s nuclear, missile, drone, and other assets. But it has also strengthened the Islamic Republic’s hold on global energy prices and will yield lots of revenue. The strait of Hormuz is now Iran’s greatest asset. And the Americans will soon be stationed further away with much-reduced military assets.
Tehran has learned it can control passage through the strait with a few threatening words. The result is a hike in insurance rates that keeps the crude, natural gas, and fertilizer ships in the Gulf. That jacks up prices worldwide. The Iranians will also learn how to modulate their controls, while allowing their own shipments to pass. My guess is that they will be satisfied with prices around $100/barrel, about where they were yesterday.
The Americans will stop dollar payments for Iranian oil, but Tehran is already taking other currencies. The world is already headed toward de-dollarization. That will not only reduce the international role of the dollar but also the effectiveness of American financial sanctions. That depends on the Fed’s ability to interfere with all international dollar payments. Paying for oil with dollars is no more than a convenience. The rest of the world will learn to do without.
Tuesday I guessed the Iranians will get $50 billion/year from a 1% value tax on shipments through the strait. That is at the low end, but it suggests 2% will yield $100 billion. Who will miss 2% the $100 million or more of cargo on a big ship? The Gulf producers (including Iraq) and the Asian customers would much rather ante up than break the embargo by force, which could cost much more.
With $100 billion from tolls and an additional $50-100 billion from higher oil prices, Tehran has hit the jackpot. That’s more than its current national budget, which had neither higher oil prices nor tolls in the equation. So Trump’s war has doubled or more Iran’s revenue. China will no doubt enjoy the reconstruction contracts that revenue will fund. It may also get a discount on the toll, though that’s a slippery slope Iran won’t want to go down.
It was always clear that the American Al Udeid base in Qatar was too close to Iran. But now it is clear Iran can target American bases just about anywhere in the Middle East. When his war is over, Trump will no doubt withdraw them. Not to the Europe he loves to hate but to the US. There they can play soldier by hovering helicopters outside Kid Rock’s home. Ironically, the only safe country for US bases in the Middle East is Türkiye, because it is a NATO member. But Trump doesn’t want any help from NATO. He says he is considering withdrawing from the Alliance that makes Americans safe.
American forces have seriously depleted their flying objects and their ability to defend them. They used their missiles, rockets, and drones in the Iran war with abandon. They lost at least one AWACS airplane and multiple advanced radars. Replenishment will take the better part of a decade. Ukraine, which desperately needs some American munitions, won’t get them. Putin will be emboldened. Trump doesn’t mind that.
This war demonstrated American military prowess. But it also revealed its strategic weaknesses, including the vital importance of the strait of Hormuz and the vulnerability of US bases. Surrender of the strait to Iran and retreat from the Middle East will weaken the US. So too will failure to support Ukraine. Trump has disempowered America.
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