/Joe Chidley: U.S. sanctions are putting the squeeze on Iran, but what comes next is anyone’s guess

Joe Chidley: U.S. sanctions are putting the squeeze on Iran, but what comes next is anyone’s guess

The war of words between the United States and Iran has been heating up for months now, but in recent weeks — marked by attacks on commercial oil tankers in the Gulf of Oman — the rhetoric has reached a more feverish pitch. The administration of U.S. President Donald Trump blames Iran for the attacks; Iran, not altogether convincingly, denies any involvement.

This follows, of course, more heated words following the U.S. ending waivers for some allies from its economic sanctions against Iran, which were reinstated last November after the States withdrew from the Iran nuclear deal, or Joint Comprehensive Plan of Action (JCPOA), even though by all available evidence Iran had been complying with the terms of the agreement.

Now, Iran is vowing to ramp up its uranium enrichment program; Trump is warning that should it threaten the United States and provoke a war, Iran will face its “official end” (whatever that means).

Were the tanker attacks a first salvo in a brewing hot war with Iran? Could armed conflict be inevitable? If so, then oil markets — which typically pay close attention to the geopolitics of the Middle East — seem not too worried about it. It’s true that oil prices spiked following the June 13 strikes against a Japanese and a Norwegian tanker, but settled down soon after. Investors, in fact, seem more worried about the state of the global economy, the U.S.-China trade war and waning oil demand growth than they do about a U.S. war with Iran. Case in point: oil prices surged earlier this week after Trump tweeted that he would meet with Chinese president Xi Jinping to kick-start trade talks next week at the G20 in Osaka.

But war with Iran? Yawn.

This might be a miscalculation, yet perhaps it’s understandable. For one thing, Iran’s oil exports have already been cut sharply thanks to the U.S. sanctions, while Saudi Arabia and its partners at the Organization of Petroleum Exporting Countries are well capable of filling any production shortfall (should they choose to do so); U.S. oil output, meanwhile, seems poised to hit a new record this year. At the moment, demand is a much bigger worry for oil than supply.

Another contributor to the oil market’s nonchalance about Iran could be that investors (like all of us) have seen a version of this drama before. Trump’s détente with North Korean dictator Kim Jong-un followed months of fiery rhetoric from both sides, which was resolved in a kind of bromance between the two, which then led to a gentlemen’s agreement (I use the term advisedly) on nuclear non-proliferation, and then to — well, basically nothing. Trump and Kim’s last meeting, in Vietnam in February, ended abruptly, with both sides walking away.

Now, it’s hard to imagine Trump making nice with Iran’s mullahs, but you get the point — this could all very well come to nothing.

Yet, quite obviously, Iran is not North Korea. Even the destabilization of a country of 90 million people, with significant oil reserves and tentacles throughout the Mideast, is bound to have repercussions. And they are not guaranteed to be positive.

It would be easier to handicap the risk of outright conflict, of course, if the strategy from the U.S. were clear. But it’s a scramble.

The economic sanctions are clearly having an effect. The Iranian rial has plunged since they went into effect, and inflation is believed to be running above 50 per cent, according to the International Monetary Fund. The IMF forecasts the Iranian economy to shrink by 4.5 per cent this year after contracting by nearly two per cent last year; for comparison purposes, it grew by more than 13 per cent in 2016. Even short of armed conflict with the U.S., Iran’s economic weakness could over time shift its power dynamics, but the recent history of sanctions doesn’t suggest that will come anytime soon. (See Venezuela and North Korea.) The more immediate impact might be in countries where Iran backs Shiite forces — Yemen, Iraq, Lebanon and Syria in particular. If Iran withdraws from its regional interests, who will step in to fill the gap? It might not be the “good guys,” and the history of power vacuums in the Mideast is not exactly reassuring.

It would be easier to handicap the risk of outright conflict, of course, if the strategy from the U.S. were clear. But it’s a scramble. Neither side says it wants a war, and the Trump administration has recently dialled back from calls for regime change. Yet its conditions for negotiating with Iran — laid out in 12 demands from Secretary of State Mike Pompeo last year — are tantamount to it.

It could be, of course, that the heightened pressure from the Trump administration is a prelude to negotiations on softer terms, but the hotter the war of words becomes, the harder it will be for either side to reach a compromise. Even if negotiations do take place someday, Trump’s deal-making record with foreign opponents is not stellar; he seems far more comfortable wringing concessions out of allies.

Meanwhile, the remaining signatories to the JCPOA — Russia, China, France, Britain and Germany — have been trying to salvage the deal and find a workaround for the U.S. sanctions. Iran has been complying with the JCPOA so far, but recently vowed to ramp up its uranium enrichment program — which would not only scupper what’s left of the agreement, but also drive the wedge between the U.S. and its European allies even deeper. That might actually serve Iran’s interests even further.

So… it’s complicated. And one has to doubt the Trump administration’s ability to navigate the complexities, whatever its goal is. For now, oil markets seem to be betting that it will all come to nothing, like so much else in the threat world of Trump.

It’s not a bad bet. But it could still be wrong.