Economic pain becomes decisive factor in Iran war endgame
The economic front in the U.S. war against Iran is reaching a crisis point for both sides, as negotiations on an end to the war remain deadlocked over Iran’s nuclear program.
Iran’s stranglehold on the Strait of Hormuz has sent average U.S. gas prices to their highest average point since the war started – about $4.18 per gallon – as President Trump’s approval ratings continue to plummet.
But the president and his top officials are stressing that Iran is running out of storage capacity for its oil and gas while under a U.S. blockade, and must accept U.S. terms for ending the war.
“We are in an economic waiting game and I think both sides think they can outlast the other,” said Kristian Coates Ulrichsen, fellow for the Middle East at Rice University’s Baker Institute.
How long both countries can weather the economic shocks will be a major factor in what a peace deal eventually looks like, or whether the countries return to open warfare.
“Undoubtedly the pressure on Iran and its difficulties are not even comparable with the U.S. The U.S. economy is strong, it’s doing fine,” said Adnan Mazarei, nonresident senior fellow with the Peterson Institute for International Economics.
“There is pressure on [U.S.] prices and those will cause difficulties and those will have political consequences for the Trump administration.”
Iran’s economy, on the other hand, is being squeezed by the U.S. on all sides, escalating poverty that was already rising over the past few years.
“Of course, the government has tolerance for some of the burdens on the Iranian people — and to the extent a government is willing to tolerate the suffering of its own people, its resilience to foreign pressure goes up,” Mazarei added.
Trump and his party are facing growing discontent about 6 months out from the midterm elections that could see Republicans lose power in Congress.
Overall, the majority of Americans disapprove of Trump’s handling of the cost of living (76 percent), including 47 percent of Republicans, according to a recent poll by the Associated Press and NORC. On Trump’s handling of the war in Iran, 67 percent of Americans disapprove.
Meanwhile, according to a Gallup Survey, a record 55 percent of Americans say their financial situation is getting worse — though about 53 percent said the same last year.
American companies and individuals are looking for relief. A group of budget airlines are seeking $2.5 billion in government assistance because of rising jet fuel costs, the Wall Street Journal reported .
And Agriculture Secretary Brooke Rollins reportedly said the Trump administration is preparing a sweeping set of fertilizer initiatives for American farmers suffering from increasing costs and shortage of products related to Iran’s effective shutdown on the Strait of Hormuz.
Mark Wolfe, executive director of the National Energy Assistance Directors Association, said that the high fuel prices are hurting poor and middle-class people – and that the situation is worsening the longer the war goes on.
“Even if the average family is paying maybe $80 more a month for gasoline, it starts to add up, because they’re also facing higher electric costs, higher summer cooling costs this summer, and … now the price of food is going up,” Wolfe said.
Wolfe noted that the stock market has remained relatively stable, but if “the economy starts to unravel, if the stock market drops by 20 [percent] or 30 percent, this is his war, so the pressure on the President would be really high.”
Trump unilaterally extended a ceasefire with Iran earlier this month. And while Iranian officials have rebuffed American outreach for direct talks, the two sides are trading proposals.
Secretary of State Marco Rubio called Iran’s closure of the Strait an “economic nuclear weapon,” in an interview with Fox News broadcast on Monday, adding the proposal Iran delivered to the U.S. is “better than what we thought they were going to submit.”
Rubio would not go into the details of the proposal but it reportedly included Iran’s offer to re-open the Strait of Hormuz while postponing talks on its nuclear program. Trump has called for Iran to hand over its stockpiles of highly-enriched uranium and give up its ability to enrich more.
Rubio signaled that the military and economic pressure – which also includes a raft of U.S. sanctions on top of the naval blockade – is prompting Tehran’s outreach.
“They’re very experienced negotiators, and we have to ensure that any deal that is made, any agreement that is made, is one that definitively prevents them from sprinting towards a nuclear weapon at any point.”
On Tuesday, Trump needled Iran’s stability, claiming on his social media site that Tehran told the U.S. it is in “a ‘State of Collapse.’”
“They want us to ‘Open the Hormuz Strait,’ as soon as possible, as they try to figure out their leadership situation (Which I believe they will be able to do!). Thank you for your attention to this matter! President DONALD J. TRUMP,” Trump posted on TruthSocial.
There are increasing signals that the U.S. blockade, which is enforced by dozens of Navy ships and more than 10,000 service members, is having an impact on Iran.
The global trade intelligence firm Kpler estimates that the Islamic Republic has between 12 to 22 days of storage capacity for its oil production, according to a report published Monday.
Kpler noted that it had not observed any Iranian tankers bypassing the U.S. blockade and that Iran is cutting oil production. The impact to Iran’s revenue is delayed but significant, Kpler added, as much as $250 million per day.
Antoine Halff, non-resident fellow at the Center on Global Energy Policy at Columbia University, wrote in an analysis that Iran may be able to “handle up to two or three weeks of crude exports at pre-war levels.”
“Rather than being driven to a sudden, catastrophic production drop, Iran can likely manage a more gradual, controlled, and limited ramp-down at some of its fields than is currently assumed in Washington,” Halff wrote.
Coates Ulrichsen, with Rice, said that decades of sanctions have prepared Iran’s economy and the country has “perfected workarounds which will enable it to at least survive in the short term.”
Anna Wong, Chief U.S. Economist at Bloomberg Economics, told The Hill that with Iran possibly shutting its production, “this calculus depends on, would the shut in from Iran work faster than the increase in oil price.”
She said that the next 2 weeks will be “critical.”
Filip Timotija contributed to this report.
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