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What a failed Iran deal would mean for oil prices and military tensions

Monday, 22 July 2019 | 16:00

The Iranian nuclear deal looks all but dead just one year after the President Donald Trump administration walked away from it and reimposed crippling sanctions on the Islamic Republic.

As Iran’s government starts breaking its agreed uranium enrichment limits, European leaders are floundering to keep it alive.

British Foreign Secretary Jeremy Hunt claimed Monday that the Obama-era deal — signed by the U.S., U.K., Iran, Russia, China, France and Germany in 2015 and intended to provide Iran economic relief in exchange for limits on its nuclear program — “isn’t dead yet.” Other European lawmakers frantically stress the dangers of killing the deal, while Tehran says it can always reverse its deal breaches if the EU defies American sanctions and resumes trade with Iran — something it appears largely unable or unwilling to do.

For many Iran watchers, the deal has already collapsed. But what will happen if it officially ends, and what are the consequences for the world?

The oil price impact
The direction of oil prices will depend on what Iran does with its nuclear program in the event of the deal’s termination, and whether Tehran’s strategy triggers a military response.

“If the deal dies and Iran starts enriching uranium again at 20% levels and spinning the higher speed centrifuges, we will be closer to a military confrontation involving the U.S. and Iran or potentially Israel and Iran,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told CNBC Thursday. “An actual military confrontation or even limited military strikes could cause prices to temporarily spike.”

Iranian leaders have repeatedly claimed they are not after acquiring nuclear weapons, rather civilian nuclear energy. But before the 2015 deal went into action the country was enriching uranium — the fissile material required for a bomb — at 20%, far above the 3.67% level required for an energy program and roughly three months away from reaching 90% enrichment, or weapons-grade uranium.

Under the deal, international inspection agencies verified that Iran had brought enrichment down to 3.67%, the level it now says it’s breaching at just over 4%.

“If war were to break out, we estimate that the price of oil would quickly surge to around $150 per barrel following the outbreak of hostilities,” analysts at London-based Capital Economics said in a research note last week. Twenty million barrels of crude per day are produced in the Persian Gulf. Conflict could prompt the closure of the Strait of Hormuz, through which one-third of the world’s seaborne oil passes.

Still, oil watchers point out that with the U.S. shale boom and less global reliance on the Persian Gulf than in previous years, there’s probably enough slack in the international market to bring prices back down.

“The deal dying and Iran continuing a staged nuclear restart that still keep it fairly far away from reaching nuclear breakout capability could put a floor under oil prices,” Croft said, but with weak demand concerns still high, it “may not move the needle much.”

Military response: Trump’s call
Most analysts maintain war in the Persian Gulf remains unlikely, but fear that with tensions so high and no diplomatic channel of communication, a mere miscalculation could set off a serious conflict.

“For the U.S., I think it all depends on Trump’s domestic political considerations and who is whispering in his ear on a nightly basis,” Richard Nephew, sanctions expert and program director at the Center on Global Energy Policy at Columbia University, told CNBC.

Trump’s hawkish National Security Advisor John Bolton “had that upper hand for a while,” Nephew said. “Now, it looks like the isolationists do.”

With his reelection campaign underway and a long-touted pledge to end America’s Middle East wars, recent actions like seemingly absolving Iran of harsh blame for shooting down a U.S. drone in June and calling off a planned retaliatory strike suggest Trump is very reluctant to go to war. However, Trump said Thursday that a U.S. Navy ship had destroyed an Iranian drone in a “defensive action” in the Strait of Hormuz earlier that day.

Nephew believes that Iran “will proceed cautiously on the nuclear side and in ways that are non-attributable — where possible — on the regional side.” Some security experts suggest a “surgical strike” on Iranian nuclear facilities by the U.S., if anything, rather than an all-out war.

In terms of military capacity, the U.S. has a far greater range than Iran, says Michael Rubin, a former Pentagon official and resident scholar at the American Enterprise Institute in Washington, D.C.

“Sure, Iranian speedboats or drones can harass shipping,” Rubin said. “But if the Iranians go too far, the U.S. Navy can strike Iranian small boats and ports from hundreds of miles away in the Indian Ocean, and the Iranian military would have no effective defense.”

Israel’s ‘any means necessary’
Israel, for its part, has said it will use any means necessary to prevent Iran from acquiring a nuclear bomb, though its internal deliberations on the matter are incredibly complex. Between 2010 and 2012 Israel’s intelligence agency, the Mossad, is believed to have been behind the assassinations of four of Iran’s top nuclear scientists, and in 2007 it carried out airstrikes against a suspected nuclear facility in Syria.

If Israel were to strike Iran, the big question will be whether the U.S. follows suit and how Iran would respond, which some analysts say would be likely via rocket attacks by its Lebanese proxy Hezbollah.

Tamas Varga, a business analyst at PVM Oil Associates in London, still sees a U.S. move toward war as highly unlikely, especially with the 2020 elections looming.

“With the U.S. presidential campaign underway, the last thing Donald Trump would need is a jump in domestic retail gasoline prices,” Varga said. “Never say never, but military conflict is currently not plausible.”

What will the nuclear threat look like?
For now, Iran’s nuclear program remains as it was since the deal was signed: a long way off from having a deliverable bomb, according to scientists interviewed by CNBC.

“Nuclear risk is minimal,” says Varga, noting that Iran’s uranium enrichment breach puts it at 4.5%, which still qualifies as low-enriched uranium. “The maximum pressure policy from the U.S. is having a devastating impact on Iran’s economy and the longer it drags on, the more the Iranian leadership alienates itself from voters.”

Nephew, the former State Department negotiator, agrees the nuclear threat isn’t imminent yet — but warns that there’s nothing guaranteeing it will stay that way.

“Right now, the risks are pretty in keeping with the JCPOA (the formal acronym for the Iran deal), but as Iran’s uranium stockpile grows, so will the risks,” he says.

“Domestically, the politics in Iran are so opposed to talks with the United States while sanctions are in place, it is hard to see anything other than a continued drift to hardline policies that help absorb some of that anger.”
Source: Forbes

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