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Welcome to The Geopolity’s What We’re Watching (3W), our daily look at the interconnected worlds of Geopolitics, Economics and Energy. Curated from the world’s leading sources of information, our analysis and commentary is designed to help you make sense of the events driving the major developments in the world.
In our most recent 3W analysis of the US – Israel Alliance war on Iran we noted that following the signing of the MOU, the US and Iran had returned to fighting. Last Thursday, Iran attacked a cargo vessel as it tried to pass through the Strait of Hormuz without coordinating with Tehran, and under US military escort. In response the US attacked Iranian military positions along the Iranian coastline, which the Iranian military said it had responded to in kind, without offering details.
At 3W we explained why this “tit-for-tat” should for the time being be considered the status quo in the War on Iran. And thus that the idea that the MOU returned the region to pre-war situation, as seems to be the dominant view among crude oil traders, was overly optimistic.
Over the weekend our 3W assessment was confirmed. The Associated Press writes that Iran on Saturday again attacked a tanker in the Strait of Hormuz, a Panamanian-flagged tanker carrying crude oil for the state-run energy company of Qatar; after which the US again attacked Iranian military “surveillance infrastructure, communication systems, air defense sites, drone storage facilities and minelayer capabilities”; after which Iran again attacked US military bases in Kuwait and Bahrain. US president Trump then in his typical fashion added fuel to the fire, saying on social media that “There may come a point when we are no longer able to be reasonable, and will be forced to militarily complete the job that we very successfully started,” writes Axios. He added, “If that happens, the Islamic Republic of Iran will no longer exist!”
Al Jazeera notes that the root cause for these rounds of fighting is in the text of the MOU. Iran is of the opinion Article 5 of the MOU gives it the right of control over the Strait. It states, “the Islamic Republic of Iran will make arrangements using its best efforts for the safe passage of commercial vessels, with no charge for 60 days only, from the Persian Gulf to the Sea of Oman, and vice versa… The Islamic Republic of Iran will conduct dialogue with the Sultanate of Oman, to define the future administration and maritime services in the Strait of Hormuz, in discussions with other Persian Gulf Littoral States, in line with applicable international law and the sovereign rights of coastal states of the Strait of Hormuz.” For that reason, Iran sees the US effort to establish a new channel through the Strait, under US control, as a violation of the MOU, for which reason it attacks ships using this channel. Iranian Foreign Minister Abbas Araghchi said in this regard, “This responsibility rests on the Islamic Republic of Iran. There is no other party or state in this respect. This is totally clear under the memorandum of understanding, and any intervention or any unilateral action will result in exacerbating the situation and also delay the reopening of the strait.”.
the Lebanese government is effectively siding with the entities who a majority of its population see as the enemy. This is commonly known as collaboration with the enemy
On Monday, the US stated it had agreed with Iran to halt fighting and renew talks, writes Axios. The two sides plan to meet Tuesday in Qatar’s capital to work out their dispute over the Strait of Hormuz.
3W notes the Strait of Hormuz is not the only subject where the US and Iran have a fundamental disagreement over the meaning of the MOU. Article 1 of the MOU states, “The Islamic Republic of Iran and the United States of America, and their allies in the current war, by signing this MoU, declare the immediate and permanent termination of military operations on all fronts, including in Lebanon”. Since the signing of the MOU, however, Israel has continued its fighting inside Lebanon. As 3W noted earlier, US president Trump justified this by claiming that under the terms of the MOU, unless Iran reigns in Hezbollah, Israel has a right to continue fighting in Lebanon. This is the basis for US secretary of state Rubio presiding over “peace talks” between Israel and Lebanon, which are less about peace and more about opening a united Israeli – Lebanese front against Hezbollah. Axios writes that a fear of Iran and Hezbollah brought Israel and Lebanese government officials together, in an attempt to prevent the MOU from affecting the situation in Lebanon. Under the guidance of Rubio they then hastily worked out an agreement under which the Israeli army is allowed to operate in Lebanon, and even increase the area in which it operates, under the pretext that it fights against Hezbollah and not the Lebanese state. Once Israel “clears” Hezbollah from an area, an Israeli-trained Lebanese army is then to take control of the area with the responsibility of keeping Hezbollah out.
Three 3W observations with regard to this, First, since the agreement does not include an immediate halt to fighting in Lebanon, it clearly conflicts with the MOU. The US will try and argue that it has nothing to do with this, that Lebanon agreed with Israel independently and voluntarily, and thus that it is a sovereign decision that the MOU cannot obstruct. Our second 3W observation is, therefore, that this is in reality a bogus narrative. The US was actively involved in bringing Israel and Lebanon to the table. Not only know, but throughout the Israeli War on Lebanon, which started shortly after the Israeli War on Gaza. And throughout this period the US has supported Israel, with the intent of defeating Hezbollah in Lebanon. In this battle, Israel was the military force pushing for this, while the US worked behind the scenes in the political arena to achieve the same thing. The latest Israel- Lebanon agreement has come into being at least in part due to US diplomacy, and since the agreement does not demand an immediate end to fighting and withdrawal of Israeli forces from Lebanon, it simply means the US went against the MOU. US president Trump’s call for Syria to enter the war against Hezbollah, as noted by The Associated Press, is further evidence that the US is going against Article 1 of the MOU. The third observation is that the Lebanese government has allowed itself to be used by the US – Israel Alliance to fight against Hezbollah. Since Hezbollah is supported at a minimum by Lebanon’s Shi’i community, which makes up 40 – 50 percent of Lebanon’s population, and in its defence of Lebanese territory against Israeli invaders probably also by a significant portion of Lebanon’s Sunni population, the Lebanese government is effectively siding with the entities who a majority of its population see as the enemy. This is commonly known as collaboration with the enemy.
All the above should make clear to any observer, even those paying only limited attention, that despite the MOU, the situation in the Middle East is far from stable at the moment. The current “Slow Burning” phase means risks shipping through the Strait of Hormuz remains at below normal levels, while elevated risks maintaining significantly higher shipping costs. Considering US behavior since the signing of the MOU, at 3W we see little chance of the current “slow burning” phase transforming into something less conflict prone. The chances of the US returning to an even more aggressive posture vis-à-vis Iran once the Gulf’s summer heat is over we at 3W see as having a higher likelihood.
we at 3W would be surprised if over this period popular protests and violent repression of such protests would be limited to Indonesia
Unlike the global crude oil market, the global LNG market appears to be pricing this in. Asian LNG spot prices surged in mid-April to around $25 per million British thermal units, up from $10.70 before the conflict, but have since fallen to around $15, writes Nikkei Asia. NA writes that behind this continued elevation of prices is the realization of gas infrastructure has been damaged by the war, while globally gas inventories have been drawn down and now need to be refilled, demanding a number of months of structurally higher supply volumes or prices.
Yesterday 3W critiqued the global oil market for assuming things are normal again. We repeat this here, because Nikkei Asia has also analysed how the war has damaged oil (and petrochemical) infrastructure. It makes clear that the oil market is in a similar position as the gas market, with exports from the Gulf remaining below normal levels while the global economy requires higher than normal level to replenish depleted stocks. The price of oil must therefore rise in the not too distant future to above pre-war levels, in our assessment, similar to gas.
This brings into focus again the impact of the War on Iran on the global economy. Nikkei Asia writes that across Southeast Asia people are scaling back on purchases, as the inflation caused by the war is making living essentials more expensive. Asian Development Bank President Masato Kanda recently warned of a risk of stagflation for Asian economies to be the end result of all this.
With this outlook, signs of political instability taker on a different meaning. According to The Financial Times, a storm has been brewing in Indonesia, where a significant portion of the country’s 300 million population is deeply unhappy with president Prabowo’s policies. Add to this stagflation as a result of the War on Iran, and at 3W wee see “blood on the street” coming to Jakarta again at some stage over the next 12 months.
And, we would add, we at 3W would be surprised if over this period popular protests and violent repression of such protests would be limited to Indonesia.