Oil, and the geopolitics of China and Iran: President Barack Obama's new military policy -- the U.S. focus will shift to two geographic areas, China and Iran -- steps up the geopolitics of oil. In the case of China, what keeps American policymakers up at night? It is the prospect of a challenge to the U.S. control of movement on the world's seas. As of now, Beijing's navy isn't impressive, but it has proven a nuisance in one place -- the South China Sea. It is there that Washington -- along with Chinese neighbors such as Vietnam and the Philippines -- has thrown down a red line. What has the South China Sea friction been about? As suggested, for the U.S. it is the geopolitical influence that accompanies dominance of the world's seaways. But, locally speaking, it is mostly a belief that the South China Sea lies above massive volumes of oil and gas. So the U.S. will maintain a naval presence in the area.
No one at the moment is going to go to war over the South China Sea, but in the case of Iran, we enter a different universe. Europe appears likely Jan. 30 to approve a near-cutoff of oil purchases from Iran. Obama signed a U.S. version of the sanctions this week. Iran's response has been military -- it calls the sanctions an act of war, and has threatened to close the Strait of Hormuz, the channel for 17 percent of the world's daily oil supply. As a demonstration that it can do so, Iran has announced more naval maneuvers, to be held next month, reports Reuters' Robin Pomeroy. So are we at the cusp of World War III, as some have suggested, especially if Iran unleashes Hezbollah on Israel? In Tehran, the Washington Post's Thomas Erdbrink and Joby Warrick describe a populace stocking up in the event of fighting. At Foreign Affairs, Suzanne Maloney suggests that Iran correctly defines the sanctions as a war footing: By attacking Iran's Central Bank, and thus its ability to pay its bills, and be paid, the West has "backed itself into a policy of regime change." Even if one regards negotiations as ineffectual, Maloney writes, a shift to promoting the ouster of Iran's rulers is worse, placing a reliance on dynamics that "Washington has little ability to influence." Commentator Fareed Zakaria disagrees. He says that Iran is no threat, but instead is becoming "weak and getting weaker."
Read on for more on Iran, and the rest of the Wrap.
A tail risk called Iran: Back in September, New York oil analyst Edward Morse wrote a paper called "Tail Risks and the Oil Market: Expecting the Unexpected." The paper (if anyone finds an open-sourced on-line link for all to avail, please let me know) describes the outsized impact of big surprises on oil prices -- "hurricanes, floods, refinery fires, tanker spills, accidents, terrorism, unpredictable geopolitical strife within OPEC," Morse writes, could drive oil prices through the roof, or just as easily cause them to collapse. That quality, he suggests, makes oil a great investment vehicle -- for those prepared to accept the risks, of course. I write about the role of tail risks this month in Alberta Oil magazine. Others have noted this general law of physics -- Nassim Taleb named it the "black swan" affect; coming from another angle, Stephen Greenblatt calls it "the swerve." For the rest of us, there is a focus on the pure impact on our lives, which at the moment includes what will happen with Iran. Will it develop nuclear weapons? If stymied by sanctions, imposed this week by the U.S. and Europe, will it send Hezbullah against Israel? Will it block the Strait of Hormuz? Will it elect to withdraw its 2.2 million barrels a day of oil exports off the market, as the Financial Times' Javier Blas asks? The FT published a column by two British writers who suggest that we might be "sleepwalking into a war with Iran."
The Obama administration is attempting to navigate the shoals by shaking the stick of death-strike sanctions, but not actually imposing them. As this blog has suggested, tough sanctions can bite, but companies and countries eventually figure out how to bypass them through the good offices of smugglers and assorted other wily middlemen. Yet the tail risks remain. This is especially so with a nation like Iran, whose essence of power lies in its menacing hint of roguish mischief.
Pakistan has halted cross-border shipments of fuel and other NATO military supplies into Afghanistan, so the U.S. has elevated the importance of its already-much-used detour through Central Asia. Iranian passenger jets, banned for refueling in much of Europe, are gassing up at a private airport in the English township of Kent, 40 miles southeast of London. Now, the Arab League has voted sanctions against Syria.
A rule of embargoes is that they rarely work as intended -- the targeted victim pays or charges more for its products; middlemen and smugglers get rich; ordinary people become poorer; new trade routes are established and old ones are deepened. Not that sanctions inflict no bite on its victims. It is simply that they rarely result in the sought change of behavior.
So, what do you do if you are Pakistan, wishing to punish the U.S. for killing two dozen of its soldiers in a weekend NATO attack-gone-wrong on the Afghan border? That's pretty simple -- during the last Pakistani embargo, a 10-day stoppage a little over a year ago, unknown assailants destroyed some 150 NATO supply trucks in Pakistan. So even though the U.S. can divert around Pakistan, look for explosions of NATO fuel trucks currently situated in the country.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.