Former U.S. National Security Advisor John Bolton resigned on September 10 for an alleged disagreement of opinion with the U.S. president, Donald Trump, toward multiple international issues, including Iran. The “maximum pressure” strategy, for example, toward Iran endorsed by Bolton can hardly be described as successful since almost all countries except the U.S. and Israel are against the approach. However, it is also unfair to call it a complete failure. With the sanctions going on, Iran‘s oil exports plummeted to around 250,000 barrels per day from around 2,500,000 at its peak in 2018, representing one tenth of its peak time levels. As a result, Tehran is more aggressive in trying to alleviate the economic consequences caused by the sanctions – and one of the convenient ways to do that is to further disturb the oil market via its Houthi proxies. The September 14 strikes on Saudi Arabia could be a new move by Iran, whose involvement is widely believed. Tehran is accused of orchestrating the attacks by Saudi Arabia and its allies, including European leaders.
In the short term, a temporary disturbance in oil supply could make an impact on the U.S. economy. On the first day after the oil attack, President Trump authorized the use of national oil reserves to ensure supplies and stabilized prices “when needed,” showing that the president is vigilant of what a skyrocketing oil price can do to the economy. The reserve was set to be used when the energy supply is severely impacted as is stipulated in the law President Gerald Ford signed in 1975. Current U.S. strategic oil reserves hold about 645 million barrels of crude oil. Other government officials are also downplaying the need to release the reserves: Energy Secretary Rick Perry said on September 16 that it’s too soon to talk about the use of the reserve.
But the fact is that the uncontrolled price surge of oil, combined with all other bearish opinions haunting the country, could be very dangerous to the U.S. economy. The inversion in the U.S. Treasury yield curve in March triggered a panic in financial industry, because it could be signal of recession in coming months. The yield on 10-year treasury bond dipped below the yield on 3-month paper the first time in a long time. Since then, the yield curve steepened and inverted rotationally several times. Although some organizations are still optimistic about global growth, many are warning of possible recession amid U.S. trade tension with its trade partners and of signs of a slowing economy.
If we examine the Middle East strategies of the U.S. through the lens of the China-U.S. trade war – another theater of maximum pressure – we might find that the tensions in the Gulf could actually add to the incentives for a détente. From China’s side, according to China’s National Bureau of Statistics, its August industrial output increased 4.4 percent compared to the same period last year, the lowest growth ever since 2002. Moreover, China imports nearly 80 percent of its crude oil consumption; any fluctuation in oil prices can be transmitted or even amplified to negatively affect its consumption and production. Under the context of structural transformation, low oil prices could be a positive factor for cheaper operating cost; now a possibly steepening oil price can add burden to the already stagnating economy.
Besides the influences to the manufacturing and consumer goods sectors, some domestic issues are also emerging to be helpful for a détente. The trade war showed a sign of easing this month when the U.S. postponed the scheduled tariffs from October 1 to October 15 and later China exempted U.S. pork and soybeans from additional tariffs. The purchase could be interpreted as a give-in of the Chinese government as due to the African Swine Fever, pork prices have soared by almost 50 percent last month, the biggest increase among any food product and contributing almost half of the entire 2.8 percent CPI growth.
Although the Saudi government claimed that they can restore oil production faster than expected, it can’t be guaranteed that further attacks on Saudi oil facility will not happen, especially when U.S.-Iran relations continue to worsen and Saudi anti-ballistic systems appear futile in face of unconventional threats like drones. Therefore, it is very likely that the tensions in the Gulf could continue to play out as a destabilizing factor. And this factor will play the role to help clinch a trade deal between China and the U.S. for no one wants their economy slowed down by oil price surges.
It should be acknowledged, however, that in the long run, the leverage that Iran holds could be handed over to the U.S. gradually as shale oil is continuing to increase its market share and suppress oil prices. According to the European Central Bank, by 2020, U.S. shale oil production is expected to reach 4.8m bpd, almost half of Saudi Arabia’s 11m bpd production in late September this year. OPEC members are facing a dilemma where they will lose their market share if they try to push up the oil price and sustain their budget or they will withstand much lower oil price or even a meltdown like Venezuela if they try to kill shale oil in its nascency by flooding the market with oil. Since 2014, the OPEC countries led by Saudi Arabia undertook the latter strategy and couldn’t kill shale oil anyway.
All in all, if the U.S. keeps up its pressure on Iran, both the American and Chinese economy could face the risk of oil price surge in the short run, which could help the U.S. and China make a trade deal. But if president Trump is to negotiate a “great” deal, a further action to stir up Middle East would not be a good idea because the president will need all the momentum he can gather to keep his economy booming. After all, U.S. efforts to prevent a total war and a complete regional meltdown, and possibly a global economic crisis, could be meaningless with the concurrent maximum pressure strategies – maybe this was also what John Bolton bashed the administration for. Therefore “maximum pressure” on both Iran and China simply won’t do the job.
If the Trump administration is not going to risk starting a war with Iran, which might be what Bolton wanted, what will happen if the U.S. keeps or even strengthens sanctions? Is a complete Gulf crisis what the administration wants anyway? Soaring oil prices and the ongoing trade war are scary enough respectively; a combination of both doesn’t seem like good news for the U.S. economy that could be on the edge of a recession. The policy logic of maximum pressure is now under question: where should the president head to now?
Dingding Chen is the founder and President of Intellisia Institute, an independent think tank from Guangzhou, China. Songfeng Tan is a research assistant at Intellisia Institute.