Bond Economics: Oil Price Spike Underway…

In the absence of traffic flowing through the Strait of Hormuz quickly, oil prices will rise a lot. Forecasts of $200/barrel are coming from some analysts, and something like that would be needed to smash down demand to meet sharply lower supply. Although there are buffer stocks, there is not going to widespread willingness to sell inventory out of them below replacement price. A release from the American Strategic Petroleum Reserve appears likely in the absence of immediate good news, but that just delays the reckoning.An oil spike of just 1-2 weeks can be shrugged off, but anything beyond that pretty much ensures a synchronised global recession. This is coming on top of the latest Nonfarm Payrolls Report (released today), which indicated that the current growth path was somewhat weaker than the last few reports indicated. In the absence of an oil price spike, this might just be a sectoral recession (information technology is shedding jobs), but we only need to wait a week or two to see how bad the oil price shock will be.

The main reason to expect that some kind of ceasefire could be reached is the weakness of the Iranian government. They recently launched a bloody crackdown on an uprising, but that uprising was not random — there are severe strains in the country. Meanwhile, their erratic behaviour has made a lot of external enemies, as one may note the general lack of external support despite the essentially unprovoked strike by Israel and the United States. As noted in an article by Kiran Pfitzner that popped up again, “hybrid warfare” using proxy armies only works if your enemies are willing to play the game of disbelief that you are not the source of the problem.

Going the other way, the main reason to be pessimistic is the continued flow of insane statements from the White House. President Trump has demanded unconditional surrender and the right to choose the successor in Iran — which is actually harsher than what Japan faced in the Potsdam Declaration (which only referred to an unconditional surrender of the armed forces). These grandiose demands are being made even though the United States occupies exactly zero square metres of Iranian territory, and there is an obvious widespread desire to avoid “putting boots on the ground.” Even if there are somewhat reasonable negotiator left in the State Department, why exactly would the Iranian side take the negotiations seriously? What stops the next decapitation strike?

Air Power and Its Limitations

I recently read Bombing to Win: Air Power and Coercion in War by Robert A. Pape which gives a detailed outline of the weaknesses of trying to win wars by bombing — which has been a recurring idea since the inter-war years. The book offers the historical background to explain why an American bombing campaign will fall short of Trump’s grandiose hopes. What he has attempted to do has been tried multiple times, with almost no history of success. The only reason to expect that this time might be different is the weakness of the Iranian government, and the willingness to define the criteria for success to be extremely minimal (the senior Khamenei was killed).

Readers who want a briefer (and free) overview of the topic can read this article by Bret Devereux.