By - Adedoyin Shittu
The world was tense on Thursday, 20th June, as we wait in earnest to see how the U.S would react to the shoot down of its $120 million drone by the Iranians. Tension escalated and oil prices shot up after Trump “itchy” fingers tweeted, “Iran has made a very big mistake”. As it stands economists said, the world is already tilting towards a global recession brought about by the tension between countries in the West and the East. This recession is as a result of President Donald Trump, whose desire to “Make America Great Again” is trying to push the rest of the world into Global recession and Anarchy.
President Donald Trump never hid his nationalist agenda during his campaign and it was his decision to pull out of the international nuclear deal negotiated by Barrack Obama and re-imposed sanctions on the Islamic Republic of Iran that led to this moment.
What is the International Nuclear Deal made with Iran
The deal simply says, if Iran agrees to allow International inspectors into their country and frequently verify that they are not seeking nuclear weapons and they do not have a nuclear weapon programme then the U.S will release the frozen Iranians funds that run in millions of dollars and remove sanctions that had been imposed on the country.
This was the money the Obama administration released to the Iranians and the deal was made in the presence of the world super powers namely the EU (Germany, UK and France), China and Russia.
Iran – in a tight position
In a show of strength, Donald Trump pulled out of the nuclear deal with Iran claiming the deal to be weak, even against other parties in the deal, and re-imposed the sanctions that was lifted by his predecessor on the Republic. The U.S. sanction on Iranian oil began in earnest in the second half of 2018. The sanctions barred U.S companies from trading with Iran and also banned U.S companies from trading with foreign firms or countries that are dealing with Iran.
The U.S rigorously approach this sanctions, as a result oil export from the Republic fell to around 400,000 bpd in May 2019. Iran like other oil producing nation depend heavily on revenue generated from oil export to run their economy. Iran’s economy which had been badly affected for several years by sanctions imposed by the international community over the country’s nuclear programme deteriorated fast in the wake of this sanctions.
The U.S. Treasury also prohibited companies from doing any business with Iran’s largest petrochemical group, Persian Gulf Petrochemical Industries Company, citing its ties to the Iranian government, together with a further 39 subsidiary companies and foreign-based sales agents.
Sanctioning Iran’s gas exports was next on the U.S. list, but this was delayed, given the more serious negative ramifications for the U.S.’s increasingly fractious relationship with the European Union states, particularly Germany.
Sanctioning Iranian gas would also mean that the U.S. had broken its promise to Germany – as the de facto leader of the EU – that in return for the EU going along with the U.S. sanctions on Iran oil, the U.S. would never sanction Iranian gas, which the EU absolutely needs.
Though the U.S sanction had not stop Iran from exporting its oil, it does so mainly by black market which is heavily discounted. This discount is currently running at a 22-25% reduction off Iran’s official selling price (OSP) minus the difference between ‘cost, insurance, and freight’ cargoes offered for ‘free on board’ pricing. This is especially true of the China-bound shipments, as they are so crucial for Iran’s economy. Also Iran recently concluded a quiet deal with Iraq to sell some of its oil via Iraq export routes and rebranded as Iraq oil.
All this has had a devastating effect on Iran and Iranians. Over the past year, the value of the Iranian currency has sunk by two-thirds, inflation is approaching 40%, and per the IMF, the economy is expected to shrink by 6% this year.
Though agricultural products and medical goods are exempted from all U.S. sanctions, prices for basic goods, including many foodstuffs, have doubled or tripled, and many medicines are in short supply. Iranians wait for hours in snaking queues for subsidized meat supplies and the government is considering reinstating the ration system that sustained the country through its ruinous war with Iraq.
Iran has displayed restraint in responding to the challenges it is facing until recently that it began to act back. All these latest events demonstrate, Iranian restraint is not a reliable mechanism for averting a conflict.
Ayatollah Ali Khamenei, Iran’s supreme leader, recently explained that negotiating from a position of weakness is a trap, and the only recourse for a country under U.S. pressure is to utilize its own “pressure tools” to induce Washington to alter its approach.
In May, Iran announced that it will soon defy restrictions set by the 2015 nuclear deal on its stockpile of low-enriched uranium. This is Iran first major step away from the nuclear accord since the United States exited the deal in 2018. Also there have been a series of attacks on tankers in the Persian Gulf, as well as missile and drone strikes directed at Saudi and Emirati infrastructure and American presence in Iraq.
The recent attack carried out by Iran was against the U.S., when it fires down the $120 million drone at the Strait of Hormuz claiming the drone was trespassing while the U.S. rebuffed it and said it was on international waters.
How U.S. – Iran tension is rearranging allies and breaking friendship
Since Trump reimposed the sanctions on Iran, the dynamic between the United States, Europe, Russia, and Iran has changed dramatically and many countries sees U.S actions as bullying.
In fact there have been growing tension between Germany and the US due to the Iran deal and the US meddling in the European Union affairs. There is also distrust between the two nations.
The genesis of the ongoing distrust between Germany and the U.S. was when former U.S. intelligence operative, Edward Snowden revealed that the NSA [U.S.’s National security Agency] was spying on European leaders, (including German Chancellor, Angela Merkel).
The UK, Germany and France, which all opposed the oil sanctions, set up an alternative payment mechanism aimed at helping international companies trade with Iran without facing US penalties.
The U.S is also considering placing a sanction on the Iran gas but the EU objected strongly to this. This U.S sanction is coming at a time the U.S. is showing displeasure at the Nord Stream pipeline project and interfering with the EU’s plans to secure cheaper gas. The project is focussed on double the capacity of the existing Nord Stream pipeline to ship gas from Russia under the Baltic Sea to Germany. After warning Germany to avoid depending on the Russians for gas, U.S said it is also considering placing a sanction on the project.
U.S., is also a gas producing country but it will cost more to supply to the EU from U.S.
According to Merkel, price of supplies to Europe from U.S stands now at no more than US$6 to US$7.50 per million British thermal units (Btu), compared with US$3.50 to US$4.00 for Russia’s pipeline gas based on Gazprom’s current taxation.
In May 2019, Iran suspended commitments under the nuclear deal agreement and gave the other signatories (China, Russia, Germany, UK and France), a 60 day deadline to protect it from US sanctions, otherwise it said it would resume production of highly enriched uranium.
Russia steps in to help Iran out of economic woes
Though there is genuine sympathy with Iranians’ plight and some real bitterness over the Trump administration’s noxious unilateralism but none of these capitals can compel banks and companies to do business with Iran, and even if they could, they are not ready to put their own economies and industries in jeopardy.
On May 8, 2019; President Rouhani said he was suspending two parts of the Nuclear deal the country was adhering to which is sale of surplus enriched uranium and heavy water to enrich the country Nuclear power. He then gave the European powers, Russia and China 60 days to meet their financial and oil commitments to the deal. If they did so, Iran would resume the sales.
Russian Deputy Foreign Minister Sergei Ryabkov on Friday, 21st June responded and said the country would be willing to help with Iran’s banking sector as well to process payments from oil exports.
If Russia could facilitate the transactions and make oil exports possible despite the sanctions, then some EU members who are displeased with the sanction will be willing to assist and not acknowledge the U.S sanctions and Iran would be able to export substantial amounts of oil to Europe and Europe would also be able to purchase both low-cost oil and gas.
How the tension is affecting the world’s economy
The recent U.S drone that was shot down by the Iranian Revolution Guards shows how quick the world could disintegrate to war.
Most of the world’s crude oil comes from troubling region.
The Strait of Hormuz is the narrow shipping lane between Iran and Oman and the world’s most strategically important oil route. Around 18 million barrels of oil are forecast to travel through the straits every day. This is more than half the 29.8 million barrels produced by members of the Opec oil cartel and presently, 30% of the world’s crude oil passes through the strait. This region is the area where Iran have capitalised to carry out their attacks. Many ships and airlines are rerouting and diverting because the waters have become unsafe.
The attacks at the Strait of Hormuz, could have a lasting impact on the price of oil as ship owners, marine brokers, insurers, and reinsurers are already lifting premiums for insuring tankers passing through the region and are charging higher freight rates for shipping oil out of the Middle East. Some ships have increased the insurance premiums by 5 percent to 15 percent, and the shipping rates and premiums are bound to increase further after the latest attacks. This will only add to the cost of the oil.
Before these attacks, the price of crude oil has been going down due to the escalating trade war between China and the U.S. The world was gradually slipping into recession because global trade flows are flat or falling in all major regions, major trading hubs around the world reveal a sharp slowdown in global trade, with freight volumes down significantly.
The demand for global oil has also greatly reduced and supply exceeded demand, China, the fastest growing economy, has also slowed faster than people expected as the trade war is having a significant impact in the country.
Price of gold have spiked up as investors are seeking a safe haven amid US-Iran tensions and the US-China trade war.
However, there was a turnaround in oil price this week due to the escalating conflict between Iran and the US. This is not because there was a demand for the oil but because of investors want to stockpile because of conflict fears.
Attacking at the strait of Hormuz is a strategy of Iran to disrupt supply in the oil market, jeopardise the neighbour energy export, affect the U.S economy and test how far the U.S. can go.
“If the world wants to make the region insecure, we will make the world insecure”, these were the words of Iranian parliament in 2012. Jeopardizing its neighbours’ energy exports offer more than simply the satisfaction of revenge; the mere threat to disrupt supply can produce price spikes, improving Tehran’s beleaguered bottom line for whatever exports it manages to preserve. Equally importantly, higher oil prices could complicate Trump’s reelection prospects, which rest heavily on the administration’s claims of economic improvements.
Donald Trump on Friday, 21st June, tweeted that he had aborted a military strike on Iran because such a response to Tehran’s downing of the unmanned U.S. surveillance drone would have caused a disproportionate loss of about 150 civilians lives.
Although according to president Trump, military action against Iran is still on the table but the Iranians vowed to gun down every assets belonging to the U.S in the middle East.
Trump has always expressed his unwillingness to engage in war in the Middle East but his reckless desire to bully the Islamic Republic to “behave like a normal nation” has started a conflict that is alienating allies and making enemies. How long can the Trump administration go in winning this war without pushing the rest of the world to war?
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