Still Lost

Two months ago this column ran a piece titled “Defeat”. It was clear to everyone except Trump that under his leadership, and through no fault of the brave servicemen and women, the US had lost to Iran. Iran hadn’t beaten the US on the battlefield (it doesn’t have the capacity for that) but after two months of bombing the US had failed to achieve its objectives and the Iranian leadership had not only maintained its hold on the country but had improved its position by getting the US to lift sanctions on it and by exercising control over the Strait of Hormuz and closing what had been an international waterway.

The US is still losing, and Trump doesn’t realise it yet. The war has staggered on week after week with on-again-off-again ceasefires and no real change on the ground. Andrew Egger of The Bulwark has described Trump being stuck in an endless reboot loop as he flips between two different positions: “If we bomb the hell out of them, they’ll give us what we want. If we stop bombing them, they’ll give us what we want.”

The US defeat, though, literally worsens by the day. As Iran fires off cheap drones and missiles on a near-daily basis, the US is forced to use its expensive, limited, supply of Patriot interceptor missiles. Iran is literally bleeding dry America’s stockpile of weapons which it needs for its own defence and that of its allies. With Iran encouraging the Houthis in Yemen to block access to the Red Sea and fire further north at targets along the coast, the conflict has already drawn in numerous countries around the region. Regional countries have discovered that US bases, which were there to protect them and the global supply of oil, are largely impotent at stopping Iran and have become liabilities as a result.

The basic crude oil price, which spiked well over $100 a barrel at the start of the conflict but has since fallen back and now sits around $90 a barrel, gives a false sense of comfort about the baseline economic damage which the war has caused the world. What is less well reported is that the crack spread has increased by around $40 a barrel since late February. The crack spread captures the price margin between crude oil and the refined products, e.g. petrol and diesel, which come from a barrel of crude oil. When that is factored in, the economic cost to consumers and businesses is much higher than the simple oil rise. That reflects reduced refining capacity in Russia due to Ukrainian attacks on Russian facilities, but also the Gulf-based refining which has been taken offline due to the closure of the Strait.

All in all, this conflict has been a huge strategic disaster for the United States. It would be foolish to view it any other way. The bigger, still largely unknowable, question is how this defeat plays out over the coming years and decades. The magnitude of the US failure cannot be overstated. That it happened within days, or at most weeks, is even more staggering. Anyone familiar with Trump’s dreadful business record and his list of massive serial bankruptcies can’t expect competence from him, but those around Trump who failed to step in to limit Trump’s worst excesses are just as guilty. Marco Rubio, for instance, fully understood the mess that Trump was getting into, yet went along to maintain his position of power even as Trump led the country to disaster.

The New Landscape

Contemplating the knock-on impacts of the war and America’s defeat is an impossible task. If nothing else, the war still remains ongoing, so perhaps, being charitable, one could argue that it’s too early to draw conclusions. That is sort of true, but some very real damage has already been done, and that is not being repaired even if American forces were somehow to achieve victory, whatever that even means in a war without any clear aims.

Perhaps one positive from the war is the obvious need to move away from fossil fuels into renewable energy sources. With record-breaking temperatures and resultant fires across Europe, the effects of man-made climate change are clear. But even an increased rollout of solar, wind and nuclear power won’t change the reality that the world, and in particular Asia, will be dependent on oil and gas for decades to come. To that end, the Gulf region will demand attention.

It will demand attention because of the new reality that the US simply cannot keep the peace nor protect the various states which host its military bases. It is not unrealistic to think that the US may dramatically draw down its forces stationed in the region. Such a drawdown is unlikely to herald a peaceful outcome as the region is home to generally weak, often family-run countries, with various armed military groups looking to fight over religious or ethnic differences.

The war has empowered the most belligerent of all the countries, Iran. Having bested Trump in his war, no one should look to praise the Islamic regime in Tehran. It is a brutal and corrupt regime which has terrorised much of its population and has shown repeatedly it has no compunction about killing its own citizens who protest the regime. This ethnically Persian, Shia-majority country sees itself as very different from its Arab-Sunni neighbours in the Gulf. The American presence in the region has long been seen as a bulwark against the Iranian threats to Saudi Arabia and the other coastal Gulf states, but that security has now been exposed. Instead, it is Iran which is the dominant Gulf player and will not let the Strait of Hormuz return to free and open transit while the Islamic Republic remains in power. Iran’s elevated role will mean that the countries around the Gulf, including Saudi Arabia, will need to come to their own terms with Iran about transiting their oil out of the Gulf via the Strait. That will allow oil to flow again through the Strait, but the base price will effectively be higher as the Iranians will certainly look to extort some form of toll or tax on non-Iranian cargo using the waterway. The US, which for centuries has looked to free passage on the open seas as the cornerstone of global trade, has been responsible for this reversal. Other states may look to follow Iran’s lead and enforce tariffs on their own nearby international waters.

The New Oil Power

Iran has been exporting far less oil than it could have been doing over the past decades due to the lack of investment in its oil industry. Under some form of sanction literally since they took power in 1979, the Islamic Republic has few friends. It has literally been a central country in the CRINK grouping of China, Russia, Iran and North Korea. A group of countries whose common ambition has been to limit the global role of the US, the grouping as a network offers nothing constructive to those outside it, but its members have also been limited in the mutual support they offer each other. That, though, has changed in recent years as Iran has given significant support to Russia, especially with drone technology. But it is China which has been the key foundation for any coherent idea that CRINK means something. China has been the largest buyer of Iranian crude oil regardless of UN or US sanctions. China has used a “shadow fleet” of tankers to maintain crude oil imports from Iran. China has officially imported zero crude oil from the country since 2022, but some estimate that its unofficial purchases run into the tens of billions of dollars.

China is the world’s largest importer of crude oil and a large official buyer of hydrocarbons coming through the Strait of Hormuz. That it hasn’t been more affected by the closure of the Strait is confusing to many. China was able to cut its imports down by millions of barrels a day without seeming to affect the economy. The assumption is that, like other countries, it has drawn down on its massive reserves to continue life as normal and also reduce the upward global price pressure on crude oil. But even that is far from clear as Chinese above-ground storage facilities remain largely full. Does China have a secret reserve? What is clearer, though, is that China’s partner Iran is now in control of the Strait of Hormuz and of the Strait of Bab al-Mandeb via its proxy, the Houthis, in Yemen. It would be reaching too far to say that China now controls these waterways. China is a huge economic support to Iran, even when buying its crude oil at substantial discounts to market prices, and the Chinese state certainly doesn’t dictate terms to the leaders of the Islamic Republic, but it does exert a lot of influence, and will continue to do so. This means that China is now a central player in a future Gulf region whether it likes it or not. In 2023, China was able to bring Saudi Arabia and Iran to the negotiating table and agree to re-establish diplomatic ties, but that was easy compared to the challenges ahead. Iran has actively attacked its neighbours and their oil infrastructure throughout this conflict, and it has a long history of attacks on Saudi Arabia. The civil war in Yemen is effectively an Iran vs Saudi Arabia proxy war. As the US presence in the region is either actively reduced or effectively ignored, the regional players will no doubt look to China to take a more active role. That is not something China has experience of doing nor will it want to do so. The region remains a collection of weak states which, while having large wealth through hydrocarbons, is wracked by economic inequality and poor and unrepresentative governance.

As China becomes more prominent within the Gulf, it has knock-on implications for the rest of Asia. Countries like Japan and South Korea are highly dependent on Gulf oil, and they will be far from comfortable seeing China taking a more active role in that region. That will then force those countries, and others in the region, to think about how they can counter that Chinese stranglehold on their energy supplies. Part of the solution will be diversification from Middle Eastern supplies, but another part of the solution is larger navies to ensure they have a military presence in any negotiation. Naval expansion in East Asia will no doubt push China to increase its already significant military budget, thereby increasing tensions further. Can anyone say with certainty that the toll regime of Hormuz could not be copied in the Taiwan Strait or the Strait of Malacca? Such tolls seem unbelievable, as it is easier to see the Iran war as a very Trumpian mess, but they simply can no longer be ruled out. A chastened US, much less willing or able to enforce freedom of navigation globally, might be unable to prevent similar tolling approaches by other countries. Such restrictions might not be financial, but perhaps one country will restrict ships coming from or going to a country it dislikes. The old norms no longer need apply.

China has shown itself to be very willing to use trade as a political bargaining tool when dealing with even its closest trade partners. Japan, South Korea and Australia can all attest to China’s willingness to restrict trade sometimes on the slimmest of pretences. So why should oil be any different? Will China encourage Iran to offer preferential treatment to countries which go along with China regarding Taiwan, for instance?

The death of Pax Americana came quicker than anyone thought. Trump and his followers may have been fed up with the burden of global leadership, but they and their descendants will find that the alternative is a far more dangerous world which the US will still need to operate in.

China’s leaders will enjoy seeing Trump getting bogged down in the Gulf, but they are going to be forced into a bigger role which their hands-off, economics-only diplomacy will not equip them well for. They offer no solutions to the tensions within the Middle East, and their inability to make friends with their closest neighbours in Asia after powering growth for decades bodes ill for a more nuanced and responsible role in the world.