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◼ REMARKS Bloomberg Businessweek September 23, 2019will likely be a new risk premium built into the price of oil
because of how vulnerable Saudi Arabia’s supply has become.
It’s easy to imagine another attack as bad or worse.
The spike in oil prices hits a global economy already
showing signs of weakness. China just reported the worst
single-month reading for industrial output since 2002. In July
the International Monetary Fund cut its global growth outlook—
already the lowest since the financial crisis—to 3.2% this year
and 3.5% next; a rate of 3.3% or lower would be the weakest
since 2009. “A negative supply shock like this, when global
growth is in a synchronized slowdown with many geopolit-
ical hot spots simmering, is just what we don’t need,” says
Rob Subbaraman, head of global macro research at Nomura
Holdings Inc. in Singapore.
For countries that produce far more oil than they consume—
Iran, for example—the price spike is an economic positive. For
the U.S., the impact will be mixed. While consumers will pay
more at the pump, oil-producing states such as Texas will ben-
efit from increased investment, and nimble shale producers
are likely to expand production. The attack damaged facilities
that process light and extra-light crudes. The U.S. is a key non-
OPEC provider of those. “This means that the U.S. shale indus-
try will directly benefit,” Vienna-based consultants JBC Energy
GmbH wrote in a note on Sept. 16. “We would expect a surge
in U.S. crude exports over coming months.”
But it’s the worst kind of price spike for the global econ-
omy. One caused by strong demand can be dealt with by rais-
ing interest rates to cool off demand. But a spike caused by a
supply disruption, like this one, is harder to treat. The higher
prices take money out of the pockets of people who are already
hurting, so raising interest rates just makes matters worse.
Such a scenario would amount to Iran spreading around
some of the pain it’s feeling at home. Since Trump inaugurated
his maximum pressure campaign, the Iranian currency has
tanked. Government efforts to forcibly fix the exchange rate
and shut down consumer foreign exchange trading backfired
when the power of the black market prevailed. At the worst of
its slump in September 2018, the rial had lost 70% of its value
since the beginning of that year.
Imports skyrocketed, and the government enforced a
wide-ranging ban on nonessentials to protect foreign exchange
supplies. Once-abundant foreign goods can no longer be found.
In some of Tehran’s poshest and busiest shopping districts,
such as Nelson Mandela Boulevard and Khoddami Street, rows
of shops that once displayed Turkish and European clothing
brands are empty or have been turned into restaurants. Critical
medication, supposedly excluded from sanctions, has become
scarce because foreign companies don’t want to risk doing
business with the pariah Islamic republic.
The Europeans have been trying to defuse the situation—
and the recent attack appears to be providing extra impetus.
French President Emmanuel Macron has been leading the
endeavor to bring everyone back to the negotiating table and
avert a larger crisis. He’ll keep up those efforts in the wake of
the latest attack, according to two officials in his office whoasked not to be named speaking about behind-the-scenes
deliberations. Giving up would provide a victory to hawks not
only in Iran, but also in the U.S., one adviser says. Germany is
supporting Macron’s efforts, according to a German govern-
ment official, who also asked not to be named. The person
says Germany is so far pleased that the parties, Saudi Arabia
included, appear to be avoiding an escalation. Many officials
are pointedly refusing to mention Iran in their condemnations
of the attack. Johannes Wadephul, deputy caucus leader for
German Chancellor Angela Merkel’s Christian Democratic
Union in the Bundestag, criticized Trump instead. “Maximum
pressure is not a policy,” he said. “The situation is becoming
more dangerous every day.”
Trump has alternated between belligerence (the U.S. is
“locked and loaded” to respond, he tweeted the day after the
attack) and backtracking. A later tweet minimized the impact
on the U.S., pointing out that America is a net energy exporter.
“We don’t need Middle Eastern Oil & Gas, & in fact have very
few tankers there, but will help our Allies!” he posted.
Iran is probably taking comfort in—if not actively counting
on—Trump’s often expressed unwillingness to embroil America
in another foreign war. (On Sept. 18 he said, “How did going
into Iraq work out?”) The Shiite nation may also be encour-
aged by its Sunni rival Saudi Arabia’s lack of appetite, or apti-
tude, for a fight. Despite spending 8.8% of its gross domestic
product on its armed forces, the kingdom has been unable to
defeat the Houthis in Yemen, where it outsourced much of the
fighting to Sudanese troops. It has also proved incapable of
defending its territory against repeated attacks. Saudi Arabia
is unlikely to act against a more formidable foe like Iran with-
out the protection and encouragement of the U.S.
“The U.S. refuses to admit that Iran has leverage and that
we often play on their terms,” says Aaron Stein, director of the
Middle East program at the Foreign Policy Research Institute
in Philadelphia. “They have rightly concluded we won’t inter-
vene and topple the regime, so they play with house money.
They are feeling economic pain, but the regime is safe, giving
them a distinct advantage in an indirect showdown.”
This makes for the ultimate test of the dealmaking skills
Trump likes to boast about. After withdrawing from Barack
Obama’s nuclear deal seemingly without a plan beyond pun-
ishing Iran, the U.S. president is in an awkward position trying
to restart any kind of negotiations. He’s replacing ultra-hawkish
John Bolton—fired as national security adviser—with special
envoy for hostage affairs Robert O’Brien. But, if Trump and
Tehran do sit down again, can he at least “leave an outlet free”
for the Iranians to avert further escalation?
“Trump is already equivocating 48 hours after a devastating
attack on Saudi Aramco,” says Barbara Leaf, senior fellow at
the Washington Institute for Near East Policy and former U.S.
ambassador to the U.A.E. “The issue of whether or not the U.S.
will lead a robust response to this attack—diplomatically, not
militarily—is what will hang over this administration for the rest
of his term in office.” <BW> �With Peter Coy, Patrick Donahue,
Jordan Fabian, Zainab Fattah, and Gregory Viscusi