Saturday, April 09, 2005

Strategy, or The consequences of replacing Iran's government by force

I find I've written on several other people's places but not here on my own blog. Oops, let's get this fixed.

I have seen several places speak of the possibility of US military action against Iran. Most concentrate on the military capability of the respective forces. A few note the distance involved for US logistics. One or two times there's a remark on the disapproval the rest of the world might have for such an action. In all, there apears to be little practical reason for the US NOT to invade.

I'd like to point out the sure and certain practical reasons, or at least some of the reasons. More accurately, they're the highly likely costs to the US of which any plan should account before action is taken. And they all cascade from a single subject - oil.

Let me start with background. A couple of weeks ago, the IEA made a preliminary notice (reported by several newspapers) that the margin for petroleum demand vs cupply capacity is very tight. The official notice is due out this month and when it's out I'll try to remember to add the link. In the meantime, allegedly the IEA is warning that a drop of as little as 2 million barrels per day will require oil importing nations to go to emergency measures. In other words, while supply capacity is increasing, demand is climbing just as fast. How tight is the margin? So tight that the various forecasters aren't arguing whether the price per barrel (and at the gas pumps) will go up, but rather how high they'll go and how long the high prices will last. Goldman Sachs is on the high side expecting prices to peak vicinity US$105 per barrel in late 2007. Folk like Louis Navellier, on the other hand, expect the peak to be a 'mere' $US65 or so over the next 6 months. The majority, to include the US government's EIA (not the international IEA) appear to expect the price to get nearer US$75-80 with the peak nearer Goldman Sachs's 2 years. Since that's the majority opinion I'll run with it: tight margins for about two years till various long-term supply increasers get online. That's the background.

Iran is producing pretty close to its estimated sustainable capacity of 3.9 million barrels per day - about twice the 'crash' margin of the IEA. An invasion would almost certainly mean a shutdown of that production for at least a month while control changes hands - assuming progress was as swift as it was in nearby Iraq. Any increased difficulty - say, because the Iranian army is better trained and led and significantly larger than Iraq's, or because the distance from landing zones to Tehran is twice what it is to Baghdad, or because the land to traverse is mountainous instead of a river valley - is certain to make the time of shutdown longer than that suffered by Iraq - which was itself much longer than the month duration of the invasion itself.

So, an invasion of Iran automatically triggers a worldwide oil shortage. First point of "so what", of course, is that the US imports no oil from Iran.

The counter "so what" is that everyone who presently imports from Iran is now both willing to pay MORE for it from other sources, AND is facing an immediate crash of their economies due to US action. Simplistically, the US will have attacked them if/when they invade Iran. "So?" again is the cry - why should we care about either of these?

Direct effect is that the oil the invasion force needs doubles in price. Add a quarter to half again the price of Iraq's invasion just for that distance and difficulty. Increase again due to the distance our tanks and aircraft and so forth have to travel. In other words, assuming the Iranians collapse as easily as the Iraqi forces did, we're looking at pretty close to twice the dollar cost due to the oil bill.

The second direct effect is the cost of oil in the United States civilian sector. Remember, other nations are bidding higher for the oil we're bidding for, which means everyone pays a lot more for gas at the pump. A lot more meaning at least half again what we're paying prior to the event, and reasonably more than double. Add to this the simple fact that some places just won't get as much as they want or need. Gas rationing is a given.

Two indirect effects result. The first is in the US, and is based on what happened the last time we had to ration gas. Stagflation, it was called. Depression with a stagnant and declining production while inflation spiked through the roof.

The second is the rest of the world, and one nation in particular. China, you see, is Iran's primary petroleum customer. About 15% of China's imported oil comes from Iran. A shutdown of Iran's oil production has an extraordinary and inevitable effect on China's economy.

Now, China happens to be the second largest holder of US bonds in the world. Most of the experts think that the biggest reason China won't dump those bonds - with a resulting crash of the US economy - is the corresponding crash in China's economy. That's probably good reasoning, but collapses if the US starts it. Stop 15% of China's oil imports and what reason does China have NOT to retaliate?

It is possible that Iran would collapse as swiftly as Iraq did were the US to invade. Personally, I doubt it'd be as swift, but taken in isolation it would be as certain. The problem is that it cannot be taken in isolation. Like it or not, the world would be intimately involved in such an invasion. And if the US's actions have an immediate and direct negative impact on the rest of the world, what reason would they have not to return the favor?


Anonymous Inigo Montoya said...

Good job. It's about time someone started looking at the Middle East in terms other than simple-minded military dimensions.

4/09/2005 7:42 PM  

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