If anything, the past couple of months and the upcoming years will be hugely beneficial for future studies concerning oil prices, producers, and economic slowdowns. The price war and the ensuing market share contentions, if examined on its own, could have produced scenarios that could be answered by analyzing precedent events in the markets and politics. The unique mixture of a global economic slowdown and the price crash, however, has created an intricate web of mutual outcomes and disagreements that are evolving daily. In my previous week’s article, I went over the dangerously escalating tensions in the Mid. East, especially in the Gulf, and how specific unwanted scenarios could develop while the world’s head is turned towards the COVID-19 crisis. This week’s article is going to be an addition to that piece with the newly added details and analyses on the subject.
A newsworthy event that aired on international media outlets this week was the change in the domestic balances in Iran. Recalling the toughened sanctions applied by the U.S. against Iran regarding its oil exports and limitations on engaging in international business endeavors, the applied measures certainly have taken their toll. The economic indicators of Iran were already deteriorating in the late months of 2019, and the widening social unrests were beginning to surface on the international news and social media platforms. The COVID-19 pandemic has undoubtedly made matters worse for all those involved. The authoritarian petrostate regimes across varying regions have been observed in multiple cases to be ensuring the domestic stability in their nations by providing extended incentives and subsidizations. The examples can range from free provision of utilities, subsidized food prices, subsidized fuel costs over to any other method that could positively affect and benefit the lives of its citizens in the absence of democratic and equal rights. The other side of the coin is, however, the extended funding of domestic law enforcement agencies for keeping things under check for any potential unrests/uprisings against the ruling regimes. But what happens when the state does not have the funds to support such programs?
While no single true-across-all answer can be given, we can observe in real-time what is happening in Iran. Such times of economic hardship, bring out the weakest links in the social domains of nations, whether it is social classes, ethnicities, religious sects, or political views. Analysts have viewed the recent(past two weeks) noticeable increase in Iran’s aggressive attitude in the Strait through different perspectives. Still, a prominent view is suggesting that the weakening current administration is giving way for regional hardliner groups to take advantage of the forming power vacuum. Such groups are not necessarily stand-alone political activists but could have its members from different branches of the government and military. Viewing the events of January as a failure of the state, the opposing parties and groups had an advantageous start to begin the current process with. Relying on the government’s inability to effectively and timely respond to such power grabs, these groups are likely to hold much more critical in how we view the regional dynamics in the future.
Additionally, being battered by COVID-19 in financial capabilities, not just Iran but all such regional petrostates are going through a rough period of balancing multiple domains. To gain more supporters and gain power room, such hardliner groups will likely pursue the aggressive agenda we can observe now as to put the current administration in a more robust position against the U.S. and in an event where political success can be achieved, it won’t be long before we can start hearing the claims for the victories from these groups. How does all of this reflect on the upcoming weeks?
Going back to our High Impact-Low Probability scenario we studied last week where the U.S. pursued a localized military intervention against Iran in the Hormuz Strait, such a situation today will hold a different outcome and implication for the stakeholders. The current power struggle feeds from the increase in the tensions, and the weighted response might be met with an excessive reaction by Iran, which might spiral out of control in a short moment. While the action might increase the price of oil and aid the shale producers of the States marginally, the adverse effects will likely outweigh this small gain in economic activity.
So how might the scenario develop? The Iranian administration made a call for the International Monetary Fund to forego the pressure of the U.S. is reviewing its funding request, which might be a tough favor to ask for when considering the U.S. holds 16.51% of the total votes in IMF and is in the leading position. It also signals that the U.S. is also trying to block funding for Iran through international organizations as well. But how well of policy is this given the backdrop we are talking on? If all goes well for the U.S. with its current policy, then in an event where the minority hardliners in the decision making bodies of Iran succeed in pursuing an openly aggressive position against the U.S. in the region, then the U.S. will have a new crisis that it has to sort out, besides the COVID-19 pandemic which is wreaking havoc across the real economy. War is known to be an economic magic pill by some when considering the economic activity it creates, but the uniqueness of our current situation kicks in here.
A leading reason for why we are experiencing the current slowdown is because the working population cannot go outside to work, enjoy, or spend. Calling the workers to their offices/factories to kick start the economy would only make the current situation worse by increasing the size of the infected population and immobilize the medical capabilities which the military might need, create disruptions and backlogs across critical sectors such as logistics and create real social unrest where those affected by the lockdowns and quarantines would be brought out of their homes to fight off another crisis, this one being openly and purely initiated by humans. Considering the upcoming elections in the U.S., such a move might not be the wisest policy to follow if the implications it could have been well understood.
In the other scenario where the U.S. chooses to cooperate on funding terms for Iran, which it morally should base on the current humanitarian medical crisis, then the current Iranian administration might gain breathing room and could potentially provide the much-needed services its citizens need and indirectly thwart the potential power grab by the opposing groups whom could cause much havoc in the region. Interestingly enough, it would be a win-win for the U.S. and Iran when you consider the alternative scenario which both powers are more than likely aware of. A critical question to ask at this point is, how soon will these countries come to terms considering the regional and the global crises?