The US and Iran? It’s actually all about China…
On 8 January as the world reeled from the US incursion into Venezuela and the rendition of Nicolas Maduro to Washington, I was so struck by what I read in the US National Security Strategy that I wrote this blog.
A couple of days later, I briefed some clients in London on geopolitical events. They asked, ‘what next?’ If there is one lesson we have learnt over the past four years, it is that major powers do not amass huge quantities of firepower on the border of another country without a firm intention to use them. We watched Russia’s build-up on the Ukrainian border; the US build-up off Venezuela and now the armada in the Gulf. I told them ‘Watch out Iran’. And here we are….
Iranian Redlines and Rationales
In late January, the US, apparently out of nowhere, moved on from antagonising its allies over Greenland and began to pick a fight with Iran. As Trump sought a redline over which he could not push Iran to provide him a casus belli, he lunged first for their nuclear programme (which, let us not forget, he had claimed the US and Israel had ‘obliterated’ in the 12-day war last year); then it was about providing support to the ‘Brave Iranian people’. Then it was about ballistic missiles, before shifting back to a focus on the nuclear programme. Negotiations in Muscat were followed by talks in Geneva, as a second US carrier strike group made its way to the Gulf. Progress was reported. For a brief moment, it seemed there was hope of avoiding conflict. And then, in the midst of negotiations (for the second time in a year), Israel and the US launched their lethal strikes against the regime (decapitating it in the first 60 seconds of attacks, apparently - it is an interesting question to ask why all the top Iranian officials were gathered in the same place, above ground, at the same time last Saturday morning…). The Iranians were furious – to their eyes, all the time spent negotiating was merely cover to allow the second US battle group to get into place.
As the missiles fell, a new rationale for the attack emerged - regime change. Perhaps there is a modicum of truth in this – if the Iranian regime was never going to surrender its nuclear or ballistics programmes, then the only way to make progress would be under a new regime. But experience in Iraq, Afghanistan and Libya should have taught us that regime change is never either simple or easy. Tunisia and Egypt suggest that regimes quickly default back to the status quo ante. The jury is still very much out on Syria.
But why now?
I cannot bring myself to believe the more outlandish theories that Trump decided to attack Iran to distract from the Epstein files – no one could be that Machiavellian, surely? Perhaps Trump, like President Bush, felt that after last year’s 12-day war, there was unfinished business in Iran – that the only way to destroy the Iranian nuclear programme once and for all was to destroy the ballistic missiles that defend it (although it is worth noting that as of this morning there has not been a single reported Israeli or US strike on Iran’s nuclear facilities). Perhaps there was genuine intelligence that Iran was about to launch a pre-emptive strike on Israel and US forces in the Gulf. Perhaps the assessment was that, if the objective was regime change, now was the optimum moment of Iranian weakness. Perhaps SoS Rubio was telling the truth when he said that an Israeli attack on Iran was imminent and that, in order to protect its assets in the Gulf, the US assessed it needed to attack first. Perhaps Trump felt that his failure to acquire Greenland needed to be offset by a victory elsewhere.
Is this all about China?
To return to my opening paragraph, reluctant though I am to impute deep strategic intent to President Trump, I wonder whether there is a deeper purpose behind this attack. The NSS is very clear about using energy as a lever of foreign policy. The NSS is also very clear that China is the US’ number one geopolitical and economic rival. In many sectors, China is now ahead of the US (renewables, shipping, electric vehicles for example). But its heavy industry still relies heavily on imported hydrocarbons for its energy needs.
So could this all have been calculated? That the incursion into Venezuela was aimed at cutting off some of China’s non-Middle East oil supplies. That the attempt to acquire Greenland was as much about control of access to the Arctic’s plentiful (if untapped) oil and gas reserves as it was about access to Greenland’s minerals and control of the NW Sea Passage (see this blog) and that, even if unsuccessful in ensuring US access to those reserves, the gambit was successful in ensuring China would not access them. And that the attack on Iran is not so much about regime change, as about making Chinese access to the oil and gas supplies which are so crucial to maintaining their commercial and economic lead over the US, both more difficult and vastly more expensive?
Iran knows it does not have the firepower to defeat the combined military strength of Israel and the US head-on. So its response was inevitably to seek to cause maximum economic pain. Attacking oil and gas refinery and production facilities in the Gulf is a calculated and predictable guerilla response whose aim is to persuade its Gulf neighbours to pressure the US to ease up its assault. In the same way, attacking shipping in the Straits of Hormuz is a predictable form of economic guerilla warfare designed to cause so much pain to the global economy that the rest of the world puts pressure on the US to desist attacks on Iran.
When I was in the Foreign Office, we ran scenarios on the possible global economic impact of the closure of the Straits of Hormuz. It is remarkable how dependent the world’s economy is on free passage through that waterway - around 20% of global oil consumption, 20% of the world’s LNG and 30% of the world’s seaborne oil trade goes through the Straits.
The US would know that, of all countries impacted by such a closure, China is amongst the most exposed. China is dependent on hydrocarbons for around 85-90% of its industrial energy needs. Approximately 14% of China’s imported oil comes from trans-shipped Iranian oil. A further 39% comes from Saudi, the UAE, Iraq and other Gulf countries. In total, more than 50% of China’s oil imports travel through the Straits of Hormuz (a further 4% of China’s oil came from Venezuela before the US incursion in January). China is similarly over-exposed to LNG cargoes, with around 30% of China’s LNG imports transit Hormuz. The closure of the Straits has already seen oil and gas prices increase by 10% and 40% respectively this week. And the price of transport has also ballooned - in mid-January, the daily charter rate for a super-tanker carrying oil from the Gulf to China was around $96,000. Today that rate stands at over $420,000 and climbing.
This means that China is affected not only by a squeeze on hydrocarbon supply from the Gulf, but also by the increased cost of shipping and the sky-rocketing global price of oil and gas. China’s heavy-industry will soon find its input costs rising, making its products more expensive and less competitive on global markets.
The US, on the other hand, as a net exporter of hydrocarbons, will be insulated from rising hydrocarbon costs (indeed, stands to benefit as it would remain one of the world’s few major exporting countries with no geographical constraints). In this scenario, US goods remain competitive on global markets (partly because they are not subject to Trump’s tariffs, partly because their energy input costs do not inflate). And if China can no longer source 18% of its oil from Iran and Venezuela, then the US can step neatly into that gap – not only keeping prices high to make Chinese goods uncompetitive, but making money for its domestic purse at the same time. This outcome not only fits with Trump’s ‘Drill baby, Drill’ mantra, it is absolutely aligned with the US NSS.
So what is the End-Game in Iran?
For the Iranian regime, this is now about survival. The regime calculates there are two parallel routes to that end – global and regional pressure on the US. If its tactics resemble a scorched-earth policy, it is because the regime believes it has nothing to lose. They will continue to lash out at all economic pressure points, irrespective of the damage those attacks will occasion to their regional relationships, for as long as their weaponry is deployable. That the Iranian regime should attack Qatar is extraordinary. But Qatar has the region’s largest gas reserves. Attacking Saudi is less extraordinary (given the historically tense relationship between the two countries), but still remarkable. But Saudi has the region’s largest oil reserves.
Whilst we were surprised by how easily Mubarak fell in Egypt in 2011, one of the lessons of the Arab Spring is that ‘going quietly’ is self-defeating - that is why Assad resisted so hard in Syria. I think that we can expect the Iranian theocracy to have learnt that lesson and to try and hang on grimly to power (hence the reports this morning of the religious police out in force across the country). Whilst the passing of the Mullahs is unlikely to be bemoaned by the majority of the population, it equally seems wildly optimistic to expect the Iranian people to thank Israel and the US for having reduced large parts of their country to rubble resembling Gaza. And I cannot see that the other countries of the Gulf are going to happily go back to the status quo ante after coming under such sustained attack from an Iranian regime which remains in power.
From a US/Israeli perspective, it does not hugely matter that their war aims do not wholly align, just as long as they do not contradict each other. Netanyahu has spoken about his 40-year desire to eliminate the Islamic regime in Iran. He is on record as wanting a ‘democratic system in Iran’. But if he cannot have that, an Iran denuded of clerical leadership and convulsed by chaos and civil war would at least no longer represent a military threat to Israel.
For the US, the war aims seem somewhat confused. President Trump said that the US would cease the attacks when Iran’s ballistic missiles and their capacity for building new missiles were destroyed – that is at least consistent with Rubio’s comments about the attack being pre-emptive. JD Vance is on record as having said that the US does not care who runs Iran as long as the new leadership aligns with US security goals (even though I am not sure the US really wants a chaotic mess in Iran). This lack of clarity suggests either that no one knows the real reasons, or that it is a truth that dare not speak its name - not even Trump would dare to say that he had plunged the region and the global economy into jeopardy merely to put pressure on China: yet the shifting explanation for the assault on Iran feels instructional.
The most likely outcome seems to be that Iran keeps up the pressure on the region and the Straits of Hormuz, but runs out of ammunition before the US, Israel and the Gulf States run out of interceptors. The US cannot maintain its forces in the Gulf indefinitely – certainly not at the current state of combat operations – so, once Iran cannot fire any more missiles, the US declares ‘Mission Accomplished’. The regime, albeit deeply weakened, survives (partly because the US has realised that, unless it sends in combat troops, it cannot destroy the regime – just as Hamas has survived in Gaza) and everyone ends up back at the negotiating table, with the global economy in a more fragile state.
And – even if it is not the primary aim of the US military activity in the Iran - the raised cost of hydrocarbons will force China to increase the prices of its products on the world market, making them less competitive, slowing down Chinese economic growth and giving the US a chance to catch up. And the US will have demonstrated how, with one intervention, it can use energy as a geopolitical lever to achieve three of its strategic objectives - strengthen the US economy; weaken the Chinese economy; and defang the Iranian regime – at the same time.