Opinion |

Soleimani Fallout: What the Price of Oil Tells Us About War in the Middle East

Panic, panic everywhere, except in the place you’d most expect to find it

David Rosenberg
David Rosenberg
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Mourner holds a poster of Gen. Qassem Soleimani as she walks back from a funeral ceremony for him and his comrades who were killed in Iraq in a U.S. drone attack Friday, passing a satirical drawing of the U.S. flag painted on the wall of the former U.S. Embassy in Tehran, Iran, Monday, Jan. 6, 2020.
Mourner by the U.S. embassy in Tehran, January 6, 2020.Credit: Vahid Salemi,AP
David Rosenberg
David Rosenberg

It’s not as if the markets always get it right about politics and war. When Archduke Franz Ferdinand of Austria was assassinated in June 1914, the markets’ initial response was “Franz who?” Only when Austria-Hungary declared war on Serbia a month later did investors realize that there really would be a war, and they panicked, just the way they should have to start with.

But on the whole, the markets are a better indicator for the future than the media and the talking heads that have been on 24/7 hysteria watch since the United States assassinated Iran’s top military leader, Qassem Soleimani, on Friday.

Archduke Franz Ferdinand, 1914Credit: AFP

Meanwhile, Trump and Iranian leaders have done what they can to fan the flames with an exchange of bellicose rhetoric.

But one way to get a handle on the risk of a war is to ask how oil prices have responded so far. As of midday Monday, by which time market players had had more thanthree days to digest developments – oil prices are hardly indicating deep concern.

Prices did spike higher on Friday but by Monday they were coming down off their peaks. Indeed, the reaction of Soleimani’s killing has been, to date, far more restrained than the response to the attack on Saudi oil facilities last September.

The oracle

The markets are a better gauge for risk than all the experts and insiders for two reasons.

The first is that as a collective, the markets don’t have any prejudices against Trump. That puts them in sharp contrast to most of the media and foreign policy establishment, which starts with the assumption that if Trump has done it, it has to be wrong and probably dangerous. That colors their take on things like his China trade policy, which we now know hasn’t done anything like the damage to the U.S. economy critics predicted it would.

The second is, that in the case of oil market, its only interest is how Soleimani's assassination will impact supply and demand for petroleum.

No-one likes to hear the word “war,” but for the markets, not all wars are equal. The markets have become enured to the state of perpetual conflict in the Middle East. Even before Soleimani met his maker, the region was aflame with fighting in Syria, Yemen and Libya, mass protests in Iraq and Lebanon, and the U.S.-Iran standoff. More of the same is unfortunate but doesn’t fundamentally change anything.

Could, after all, Soleimani’s killing ignite a conflict that would fundamentally change things? Here we enter the territory of uber- speculation. However, the least likely outcome is an all-out war between the U.S. and Iran.

As Tehran learned during its devastating war in the 1980s with Iraq, it can’t win a conventional war even against a third-rate power. Against America, it might as well surrender without a fight.

What’s left for Iran is pinpoint attacks, cloaked by plausible deniability, against American friends in the Middle East and, even more likely, against U.S. oil assets in Iraq (assuming Trump doesn’t beat Iran to the punch by sanctioning Iraq, as he has threatened).

However, its ability to do much economic damage that way is very limited. Iraq accounts for just 5% of world oil production; even if it were shut down, its impact would at most be to give a small boost to the price of oil. As was the case last September, when the market’s quickly calmed down after the Saudi refinery attacks, there is too much oil supply chasing after too little demand. Iran would have a hard time changing that balance by an occasional, anonymous strike and oil tanker or refinery.

And if it did, it would find that the main victim isn’t America, which is now a net oil exporter, but China, which is a major importer of oil, much of it from the Middle East. Iran doesn’t need more enemies.

Could things still go terribly wrong? Of course, no one in their right mind would have thought that a Serbian’s killing the heir to the Austro-Hungarian throne would draw Germany, France, Britain and Russia into a life-and-death struggle that would change the course of history. But it did.

Oddly enough, I think the danger comes more from Trump than from Khamenei.

In his day, Richard Nixon employed what is known as the madman theory – a strategy of intimidating your enemies by posing as an irrational and volatile leader.

The idea is to pose as one. The problem with Trump is that, if the media reports about how he came to the decision to take out Soleimani are true, he may not be wholly irrational, but he is volatile and emotional, swayed more by TV reports and praise or damnation from his supporters than by strategic calculations.

That creates a real problem even for the cool hands of the oil market. Trump, or so we believe, doesn’t want war; he wants to exit the Middle East. But it seems that in the heat of the moment he’s ready to take a step, like assassinating a key Iranian figure, that will draw the U.S. even more deeply into the region. The ghost of Franz Ferdinand may yet come to haunt the markets.

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