In the Iran disaster, Trump’s only choice is a recession or a worse recession

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John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Maybe it’s brave talk, or maybe Donald Trump just doesn’t understand the difference between an oil exporter and a net oil exporter, but the U.S. can’t just leave the Middle East and leave it to the “countries of the world that do receive oil through the Hormuz strait” to reopen it, as he said in Wednesday’s speech. Like it or not, he’s stuck there, and the only options he has left for leaving are unappealing.

While the U.S. produces more oil than it consumes, American refineries aren’t optimized to process most of it. So, the country exports most of its crude and then imports what goes into American cars and gas plants. Therefore, the U.S. can’t cut its oil market off from the world and tell everyone else to “get their own oil,” as he put it. Its market is integrated with the world’s, and global prices set American ones.

That’s why the oil price responded to another day of closing in the Strait of Hormuz by ignoring Mr. Trump’s speech and rising further. Although oil and gas companies are enjoying a windfall, the vast majority of Americans are feeling the pain. And in a car-loving country like the U.S., that’s not only raising inflation and with it, interest rates, but tightening purse-strings (not least for the many Americans who have no option but to drive to work).

Oil prices continue to climb and could surge to US$150 if access to Strait of Hormuz remains disrupted

Time is running out to reopen the Strait. So far, the buffers in global energy markets – stockpiles, releases from strategic reserves, oil that left the Persian Gulf before the war broke out and oil on which sanctions have been lifted – have helped to keep price rises from spinning out of control. But those buffers will dry up soon, and shortages are emerging in some markets, notably East Asia and Africa. Meanwhile, the prices of other distillates, such as fertilizer, diesel, jet fuel and polyethylene, are shooting up, including in the United States.

By next week, those shortages will start spreading in Europe. A week later, they’ll hit the Americas, and even the U.S. won’t be immune. Unless the White House miraculously finds a way to end this crisis within the coming days, things could start to get very difficult for Americans and Canadians.

Unfortunately, it’s presently up to Iran, not the U.S., to reopen the Strait, and it’s highly unlikely it will do so even if Mr. Trump decides to walk away from the conflict. Instead, emboldened by the power it has obtained to force its archenemy to back down, the regime in Tehran will demand further concessions before agreeing to a ceasefire.

Those concessions, which would probably involve a lifting of sanctions, an end to Israel’s war in Lebanon, compensation for war damages and a guarantee the U.S. and Israel will no longer attack Iran, would amount to a U.S. surrender. It would be a bitter pill to swallow, but it would at least mean that a short economic downturn would be followed by something close to a return to normal.

The only alternative is for the U.S. military to take matters into its own hands and force the Strait open. That, in turn, would require a major ground operation to secure control of the Strait. While he talks peace, the U.S. President is also preparing for war, moving more ground troops toward the region to give him the option of seizing control of the Strait himself.

Tony Keller: Trump has no Plan B in Iran. He never had much of a Plan A

While an occupation could bring a definitive end to this crisis, there are two large risks in the way Mr. Trump is going about it. First, even if he doesn’t intend to launch an invasion but merely wants to raise pressure on Iran to secure better ceasefire terms, the risk is that the preparations alone could suck the U.S. into what the military scholar Robert Pape calls an escalation trap. Once troops are in the region, the new dynamic may impel them into Iran, not least because they would likely become targets for Iranian missiles.

Any expert with knowledge of the regional landscape agrees that the size of the force the U.S. is assembling wouldn’t suffice to take anything more than a few key sites.

Iran would almost certainly still be able to target both U.S. troops and shipping in the Strait. This would force a further escalation of the American troop presence, much like what happened in Vietnam. The result would be a longer, deeper war that could leave the Strait closed for months. The impact on the world economy would be dire.

In effect, Mr. Trump’s only two options now are a recession or a depression. Don’t take the current calm in markets to mean much. After all, during the 1973 oil shock, stock markets only started falling after the ceasefire was agreed – and then they fell hard. This tale has only begun.