The fourth of The Fusion Report series on the US-Iran conflict
This is the fourth in The Fusion Report series on the effects of the U.S.-Iran conflict on the price of oil and natural gas. In this installment, we’ll look at what the impact would be to end the conflict. Does the price of oil and gas go down from their Monday price of $101.44 per barrel (9am ET on Monday) and by how much, especially since the volatility has been as high as $10 a day? And just as importantly, does the supply of crude oil and liquified natural gas (LNG) from the Gulf increase back to normal levels, and how quickly? We’ll explore the answers to these questions, and the factors that are driving them.
If hostilities ended, the conventional wisdom is that removing the threat on shipping through the Straits of Hormuz would likely result in sharp decreases in the price of oil and gas in the short term. However, it would depend considerably on the damage that has already been done to the Gulf states oil and gas infrastructure. Just as important to the price of oil and LNG are the expectations of how long such a peace would last, which is what drives where those prices actually go. These expectations revolve around the extent to which the U.S., Israel, and Iran got what they were looking for out of the peace deal. Let’s look at each country involved, and the likelihood of achieving their desired outcomes from your perspective.
Israel: Iran’s Nuclear Program, Proxy Wars, Stay Out of Jail
Israel’s motivations in the U.S.–Iranian war center on neutralizing what it sees as an existential threat from Iran’s nuclear and missile programs, as well as from Tehran’s network of allied militias such as Hezbollah that have long targeted Israeli civilians. Israeli leaders, particularly Prime Minister Benjamin Netanyahu, have pursued the war as a chance to severely weaken or even topple the Iranian regime, eliminate Iran as a rival regional power, and preserve Israel’s status as the only nuclear-armed state in the Middle East. Analysts also note important domestic incentives: the conflict helps divert attention from corruption charges and political crises at home, reduces scrutiny of Israel’s actions in Gaza and elsewhere, and may strengthen Netanyahu’s political standing ahead of elections by projecting an image of wartime leadership.
Iran: Survive, Survive, and Survive
Survival in its many colors and flavors is the only thing that Iran is trying to accomplish in this war. Iran wants to survive as a sovereign nation, and its leadership wants to keep the current regime intact to the extent possible. Beyond that, it aims to increase the cost of the war to the US, Israel, and its allies through its regional proxies (Hezbollah, Hamas and the Houthis), while remaining a regional power. Finally, Iran wants to secure its nuclear security choices, and potentially negotiate reparations and economic relief. Unless regime change occurs, it is not likely to lose most of those things, at least from a factual standpoint. For Iran, maintaining the status quo is “good enough”.
The US: Extinguishing Iran’s Nuclear Program (For The Right Price)
Going in, one cannot help but think that the Trump administration was hoping for another repeat of Venezuela, a regime change on the cheap. However, unlike Venezuela, Iran has had over 45 years of conflict and struggle to ‘harden’ enough of its population to make a cheap regime change highly unlikely. Moreover, if Iran simply wants to survive, the US wants anything but that, and its stated goals would be to ensure Iran gets as little as possible out of its war. However, it has to be ‘at the right price’ for the US. If the US economy continues to be negatively impacted, the likelihood that the midterm elections will turn out negative for Republicans is high. Unless things escalate significantly, that boat has probably already sailed.
The War and The Price of Oil: It’s All About The Economy
It is clear that peace is better for reducing the price of oil than the war is. The real question is how long it will actually last. It’s clear that the Iranians sooner or later will exact revenge for the killing of the Ayatollah and other high-ranking people in their government. Moreover, many in the Iranian government and their allies will conclude that their approach to this conflict, while costly, was in the end successful in that they were able to outlast the US and Israel with enough of their weapons to fight again another day.
For now, Israel seems ready to move their fight back to Lebanon, and let Iran go for the moment. As long as oil and LNG shipments through the Strait of Hormuz restart, Donald Trump can claim some level of a victory, even if it is somewhat pyrrhic. In any case, we don’t have a ceasefire yet, and even if we get it, the amount of time that it lasts is questionable. In the end, the greatest price may have been paid by Western Europeans and East Asian economies, who had huge oil price spikes, even though many of them remained neutral.
