Nuclear Leverage

by Dan Denning

“The war games were unsuccessful at preventing the conflict from escalating,” an anonymous U.S. Air Force source said; on war games conducted by the CIA and Defense Intelligence Agency for a preemptive U.S. strike against Iranian nuclear facilities.

It is always foolish to speculate about war plans. If the truth is the first casualty of war, the war plans must take a close second place. Defense Secretary Donald Rumsfeld famously said, “No war plan survives the first contact with the enemy.” And when it comes to a country like Iran, there is a limited amount of information publicly available about military targets in Iran, as well as the military capabilities of the Iranians.

Without sufficient information, it’s fruitless to try to guess how a military conflict with Iran would unfold in detail. However, we can make some general strategic observations and follow those through to their investment conclusions.

But perhaps I’m getting the cart before the horse. Is a war about to break out between the West (Israel and the United States) and Iran? I don’t have the satellite imagery to confirm it. There are, however, a series of facts that suggest it’s possible, and sooner rather than later:

Iran Holds War Games: While the CIA and DIA war-gamed U.S. air strikes, the Iranians had boots on the ground. According to the Tehran Times, 12 divisions of volunteer forces participated in the Ashura 5 grand military exercises in western Iran in mid-September.

Iran Test-Fires Strategic Missile: In the same war games, Iran’s Revolutionary Guards test-fired a strategic missile capable of hitting targets as far away as Israel (807 miles away).

Iran Defies U.N. Order on Uranium Enrichment: In late September, Iran announced it was preparing to enrich uranium. The head of Iran’s Atomic Energy Organization, Gholamreza Aghazadeh, said Iran had started converting 37 tons of raw “yellowcake” uranium for use in nuclear centrifuges.

If the facts above read like a neocon case for “WHY WE MUST ATTACK IRAN NOW, BEFORE NOV. 2,” it’s purely intentional. There are many angles you could take on this. But the obvious ones are the ones most likely to be put forward by the Bush administration, which already has Iran on its “axis of evil” hit list.

First, the Iranians have admitted to having a nuclear program, although they’ve claimed it’s peaceful and not meant to produce weapons. If you find it odd that the fifth largest exporter of oil in the world (2.26 million barrels per day) is building nuclear energy plants, you’re not alone. But let’s leave that aside.

Second is what the Iranians have said. Who can blame them for pursuing technology that would defend them from America? After all, directly to the east are Americans in Afghanistan. Directly to the west are Americans in Iraq.

Whether this was part of the Bush administration’s grand strategy or not, it has had the effect of putting the Iranians on the defensive. Perversely, it may have also accelerated their development of a nuclear weapon with which to forestall any U.S. action – a lesson they must have surely learned from the North Koreans.

The Iranians are suddenly sounding like they have some nuclear leverage. Massoud Jazaeri, a spokesman for Iran’s Revolutionary Guard, recently said, “Our response to any invasive measure will be massive.” That sounds ominous enough. But it also sounds primarily DE-fensive, not OF-fensive. That is, until you read what Max Boot reports in the Los Angeles Times. Boot quotes Hassan Abasi, another senior member of the Revolutionary Guards, as having boasted that Iran has “a strategy drawn up for the destruction of Anglo-Saxon civilization.”

It would be impressive bluster if it was just bluster. But there’s an awful lot at stake in the region. I’m talking, of course, about oil.

The Middle East is home to nearly 70% of the world’s proved oil reserves. The United States imports 20% of its oil from the Middle East. Nearly all of the oil that comes from the Persian Gulf must pass through the Strait of Hormuz, which Iran possesses a commanding view of.

Without drawing up a strategic battle plan, it’s pretty clear how a war with Iran might unfold. The United States might hope to launch a small-scale strike on Iranian nuclear facilities and leave it at that. But as the quote at the head of this article suggested, that didn’t prove possible in the war games. Why?

Iran could deal a devastating blow to the United States economically – without touching Israel or even fomenting chaos in Iraq (although it’s capable of doing both). With supplies in the United States already so tight…what would a deliberate Iranian attack on oil tankers in the Strait of Hormuz do?

We’ve seen how threat of civil war in Nigeria, the seventh largest exporter in the world, were enough to drive oil futures prices over $50. Iran is the fifth largest producer in the world. Iraq, by the way, is the 10th largest and would surely be disrupted.

If all this is sounding tremendously bullish for oil prices, it should. Call buyers should look at XOI, MGO, OIX, and our old favorite at Strategic Options Alert, OIH. OIH is the oil service index. If there were a petroleum conflagration in the Middle East, there would certainly be a lot of work out there for service companies afterward. And of course, any long-term destruction to the oil production capacity of the region would see the oil price skyrocket.