Iran May be the Threat but Iraq is the Prize

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It is all too tempting to focus narrowly on the maritime crisis in the Gulf, and the potential threat to the flow of petroleum and the world’s economy. This is where the daily headlines focus, and some form of threat is all too real. In practice, however, the U.S. already faces other threats in the region and from Iran, and at least one is potentially far more serious in grand strategic terms.

These “other threats” include Yemen, Syria, and the failures of the Arab Gulf states to unite in creating an effective defense against Iran. Most importantly, they include the U.S. and Arab struggle with Iran for influence in the Gulf.

The Potential Risk to World Petroleum Supplies

If one examines the worst case in terms of Gulf oil exports, the potential threat to global petroleum supplies is all too serious, and almost all current news media and commentary badly understate its potential impact on the United States. The U.S. Energy Information Administration (EIA) estimates that “the Strait of Hormuz is the world's most important oil chokepoint because of the large volumes of oil that flow through the strait. In 2018, its daily oil flow averaged 21 million barrels per day (b/d), or the equivalent of about 21% of global petroleum liquids consumption.”

EIA also warns that “there are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz. At the end of 2018, the total available crude oil pipeline capacity from the two countries combined was estimated at 6.5 million b/d. In that year, 2.7 million b/d of crude oil moved through the pipelines, leaving about 3.8 million b/d of unused capacity that could have bypassed the strait.”

This means that if a war or crisis totally blocked the Strait of Hormuz for an extended period, an absolute minimum of over 80% of the normal flow of petroleum plus 4.1 trillion cubic feet of liquid natural gas (LNG), one quarter of the world’s trade in LNG – would stop flowing to the global economy.

More generally, it could mean a war that blocks critical food and goods shipments into the Gulf and that targets key facilities – creating damage that could take months to repair, crippling some aspects of Iranian and Arab Gulf development, and creating a lasting climate of tension and instability. The Gulf is not a region where wars have so far ended neatly, or reduced the risk of future conflict, extremism, and terrorism.

There is no exact way to estimate the impact of such a worst case on the global and U.S. economies. It is clear, however, that other major exporters like Libya and Venezuela already have major problems. So do less important exporters like South Sudan, Syria, and Yemen.

It is also clear that the U.S. would experience serious problems in spite of what some call “energy independence.” The U.S. may no longer be a major oil importer relative to its domestic production and its own petroleum exports. However, the U.S. would still have to deal with the same rises in price as the rest of the world, and compete for oil and products at those prices, as would every other state in the world.

It is also clear that most reporting on “energy independence” at least tacitly understates the impact of cuts in Gulf petroleum exports on the U.S. economy because such reports fail to examine anything other than the flow of oil. In practice, the U.S. would face serious problems for other reasons.

As the EIA again notes, 76% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2018. China, India, Japan, South Korea, and Singapore…accounting for 65% of all Hormuz crude oil and condensate flows in 2018.” This flow is critical to the U.S. economy because the manufactured imports from such Asian states are now a larger share of the U.S. economy today than direct U.S. oil imports were in the past.

In fact, America’s overall economy is now so dependent on Asian exports of key manufacturing components and goods from nations that are heavily dependent on Gulf oil exports that this has become the key measure of U.S. dependence on the steady flow of petroleum and LNG out of the Gulf – not U.S. petroleum imports. As a result, talking about “energy independence” in terms of U.S. petroleum imports has become a macroeconomic oxymoron.

That said, the real-world probability of a conflict that causes this level of damage to Gulf oil exports and world petroleum supplies may be small. No one who has studied any period of military history can put faith in rational bargaining or intelligent restraint. However, a worst case that produces a prolonged massive reduction or halt to Gulf petroleum and gas exports would almost certainly require a near-total maritime crisis or escalation to a major war that goes far beyond attacks on tankers and shipping.

A temporary surge in prices and/or a more limited gap in the flow of Gulf exports would still have some effect. However, world oil prices today are now far lower than they were during the days when crude cost $100 or more a barrel. Iran could also only escalate to such a war if it were willing to end all of its petroleum exports as well as those of its Arab neighbors. Iran is already in a critical statewide economic crisis – much of which is self-inflicted by its own failed economic policies. It is far from clear whether its leaders are willing to put the nation in a position in which it will suffer far more than it does from today’s sanctions.

The Persian equivalent of jingoism aside, Iran would have to start and keep fighting a war that it cannot possibly win, and in which it would suffer far more damage that its Gulf neighbors if the war escalated to attacks on land targets. Unless the U.S., its Arab allies, and nations like Britain and France failed to respond to Iranian escalation, such a war would also probably threaten the postwar survival of the present Iranian regime. Losing the second major war since 1980 is not the way to calm popular protests.

In contrast, if Iran can find some way to compromise on the Joint Comprehensive Plan of Action (JCPOA) that exchanges long time limits for relief on sanctions – and do so after “confronting” the U.S. and U.K. successfully in the Gulf – it may well be able to “win” in four other areas.

The Arab Gulf’s Self-Destructive Game of Thrones

Iran is not the natural hegemon of the Gulf, and should not have its current level of impact on Gulf security. The Gulf Arab states have far more wealth and financial and petroleum resources. The Arab states vastly outspend Iran on military forces, and out-import arms by more than an order of magnitude. They should be able to deter and defend against Iran with minimal outside aid.

Unfortunately, however, America’s Arab strategic partners seem more interested in self-inflicted wounds than in security, and they focus on their own peculiar “clash within a civilization.” The Arab divisions within and outside Syria, Iraq, and Yemen are all examples of cases in which Arab divisions inside each country – and outside it – handed Iran major strategic opportunities that it could hardly resist.

Iran was not particularly aggressive in any such case. It effectively walked in through a door that Arab states had opened and took the gift its neighbors handed it. The U.S. did not help by invading Iraq in 2003 without any clear plan for the future, but the Arab failure to act with any unity or decisiveness before or after 2003 also did at least as much damage.

What has been even worse – and to some extent borders on strategic infantilism – has been the lack of unity within the Arab Gulf. Efforts at Arab alliances and military unity have always bordered on theater of the absurd, but the Gulf Cooperation Council (GCC) should have emerged after 1980 as one of the world’s most success alliances. It has had the money, the outside support, and the time.

Instead, member countries have spent vast amounts of money on defense without creating effective interoperable forces or focused on common missions. Gulf Arab states have kept up the petty feuds of the past, and have only come together to the extent that the U.S. has brought them together.

The framework of the GCC alliance still exists. However, the Saudi-UAE-Bahrain-Egypt boycott of Qatar goes on and on. The competing Gulf Arab efforts to shape a post-Assad failure collapsed almost when they began. There is no cohesive effort to bring Jordan into the GCC. Saudi and Omani tensions quietly continue. Kuwait attempts neutrality and mediation without broad support. And now, questions exist about Saudi and UAE cooperation in Yemen and elsewhere in the Gulf.

Demonizing Iran seems to be a substitute for either deterrence negotiation, and for coming to grips with Yemen, Syria, or Iraq in a realistic manner. Iran will never be the hegemon of the Gulf, but it will be perceived as far stronger than it is and have the ability to exploit the divisions within the GCC, build up its missile and aid defense forces, and consolidate its gains in influence in Syria, Lebanon, Iraq, and Yemen.

Syria, Lebanon, and Yemen: A Limited Iranian Spoiler Role is “Victory”

Iran already seems to have “won” in Syria, Lebanon, and Syria, although “win” is a relative term. Nothing about the current situation actually indicates that Iran is going to defeat Israel, or control Syria or Lebanon. It seems doubtful, however, that Iran has ever had any serious plans to do this. Rhetoric aside, Iran has already established a position where it can play a lasting spoiler role. Both the Assad regime and the Hezbollah would have to self-destruct to eliminate a high degree of continued influence in Syria and Lebanon.

Iran’s spoiler role in Syria and Lebanon not only makes Iran the most visible supporter of hardline Palestinian movements in ways that win it at least some popular support in the Arab world, it also puts acute pressure on the U.S. to stay in Syria, gives it added leverage over Turkey and Israel, and virtually ensures that the word “Arab” will have become a functional synonym for “divided and dysfunctional.” The cost of this to Iran is relatively small, and the risks are largely indirect.

Iran does not need true clients or proxies in either the Hezbollah or the Assad regime. All Iran needs is the ability to stimulate existing problems and tensions, supply enough arms and funds to keep up Hezbollah and Assad, and keep “fighting” its current form of hybrid operations and warfare. In fact, the main risk to Iran is if it over-engages and starts taking its own rhetoric seriously. Iran will gain far more from simply prolonging the current level of tension and instability than from any chance of winning by escalating.

Iran may prove equally able to win at this level in Yemen. Recent divisions between Saudi Arabia and the UAE – and the fact that Oman has stood aside from the start – make any Arab victory in Yemen seem unlikely. It is not clear that the Houthi can “win” in any meaningful sense. Even if Saudi Arabia and the UAE completely withdraw, Yemen is so divided, and the Houthi are so limited in numbers and in area of control, that the likely result is the violent fragmentation of Yemen and a continued humanitarian nightmare.

Once again, however, simply having a major Houthi faction survive is enough. Playing a spoiler function allows Iran to put major pressure on Saudi Arabia at minimal cost as well as offers some hope of a base or port Iran can use at the entrance to the Red Sea.

As Sun Tzu pointed out some 2,600 years ago, influence is sometimes better than control. Yemen may be an almost impossible challenge in terms of being put on a stable path towards unity, peace, and development. Exploiting it from the outside, backing Shi’ite elements, and creating a lasting threat to Saudi Arabia at a time fraction of what Saudi Arabia spends on military forces seems all too easy and practical.

And Then, There is Iraq

The real prize for Iran, however, is Iraq. Iran can benefit from leveraging its position elsewhere, and possibly from the current confrontation in the Gulf. The benefits to Iran are limited, however, unless it can keep Iraq from reemerging as a strong and independent state.

A unified Iraq, with its own security forces and a reasonable level of unity and governments would confront Iran with a major barrier to threatening the rest of the Arab states in the Gulf, and providing major military support to Syria or the Hezbollah. It would show that Sunnis and Shi’ite can cooperate in ways where both side benefit, and that peaceful development offers a far better alternative than extremism. It could be an American strategic partner through U.S. military and economic aid and investments without having a U.S military presence, and it could act as a potential bridge in building better relations between Iran and the Arab Gulf states.

At present, however, Iran has a real chance of dominating at least part of Iraq, or of winning a significant battle of influence with the U.S. and its Arab neighbors. U.S. military aid and airpower may have been the key to the defeat of ISIS in Iraq, but Iran has been the key sponsor of Iraq’s Popular Military Forces, and it has established substantial influence over Iraq’s ground forces and other security elements.

Iraq is politically vulnerable, and Iran’s influence over the Iraqi governments Shi’ite elements is growing. Iraq’s most recent election has not gone well, and the hopes it had raised have sharply declined. Polls do not indicate that its Shi’ite Prime Minister, Kurdish President, or Sunni Speaker of the Parliament have great popular support, and the Prime Minister increasingly seems to be subject to Iranian influence.

Part of the problem is the government’s failure to help Iraq’s Sunnis in the West recover from ISIS occupation and the damage done by the recent fighting. However, the government has not ended the longstanding tensions between the Kurds and the central government, and has failed to provide Iraq’s Shi’ites the level of development they need.

The World Bank governance indicators now rank Iraq as one of the worst governed states in the world, and Iraq’s government remains one of the world’s most corrupt regimes. Transparency International ranks Iraq the 12 th most corrupt regime out of 188 nations. The Iraqi government has so far failed dismally in providing sufficient recovery aid to its largely Sunni civilian populations that were caught in the fighting with ISIS in the West. It has done little to bring any other kind of ethnic or sectarian unity, and far too much of its oil “wealth” is consumed by its politicians, officials, and a state sector that is one of the most overpaid and least productive in the developing world.

Iraq’s economy suffers at least as much from the petroleum disease as it gains from it. It has large resources and export income. The OPEC Annual Statistical Bulletin states that Iraq has 145 billion barrels of proven oil reserves and can produce 4.4 million barrels a day. It reports that its petroleum exports were worth $68.2 billion in 2018. The CIA reports that these exports provide some 85% of government revenue and 80% of foreign exchange earnings. However, history has shown that these oil earnings are all too easy to misuse and steal.

OPEC also reports that Iraq’s GDP per capita is only $5,571, one of the lowest in the Gulf. The current CIA World Factbook also describes its economy as follows:

Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors' concerns regarding the uncertain business climate. The Government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles, including a tenuous political system and concerns about security and societal stability. Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors…Iraqi leaders remain hard-pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace. Unemployment remains a problem throughout the country despite a bloated public sector. Overregulation has made it difficult for Iraqi citizens and foreign investors to start new businesses. Corruption and lack of economic reforms - such as restructuring banks and developing the private sector – have inhibited the growth of the private sector.

The World Bank notes that Iraq’s oil income is increasing, and that there are some positive developments in fiscal and macroeconomic terms, but also that:

At 48.7 percent, the country has one of the lowest labor force participation rates in the world, and in the region especially for women (12 percent) and youth (26 percent). The unemployment rate, which was falling before the ISIS and oil crises hit, has increased beyond the 2012 level to 9.9 percent in 2017/18. Moreover, almost 17 percent of the economical-y active population is underemployed. Underutilization is particularly high among internally displaced persons, with almost 24 percent of IDPs unemployed or underemployed… more than a fifth of the economically active youth (ages 15 –24) do not have a job, and more than a fifth of the economically active youth is neither in employment nor in education or training (NEET)… unless there is a significant reorientation in fiscal policy to a comprehensive recovery approach, there will be limited fiscal space to sustain post-war recovery and longer-term development… Creating the adequate fiscal space for growth-enhancing programs in human and physical capital will be key for diversification and job creation. Social conditions remain challenging reflecting under-investment and weak institutional capacity, a gap that becomes glaring for predict-able crises such as the seasonal electricity and water problems, especially in Basra. Fiscal institutions have yet to adapt to volatility in oil prices and the risk of pro-cyclical policies remains very high. A decline in oil revenue, without continued structural reforms, and the continuous rise in budget expenditure according to 2019 budget, will lead, sooner or later, to crisis-driven adjustments and stop-go recovery.

If Iran can exploit these fault lines – and largely remove U.S. and outside Arab influence – an “influenced” Iraq would give Iran strategic depth on its 1,599-kilometer border with Iraq and far better access to the Arab Gulf states, Jordan, Syria, and Lebanon. Iraq is also Iran’s best chance of substituting a sectarian identity between Arab and Persian Shi’ites as a substitute for ethnic identity. Iraq may be an Arab state, but the CIA estimates that it is 64-69% Shi’ite and large numbers of its 29-34% Sunnis are Kurds, Turkmen, or other sectarian minorities.

Iran has already made major economic gains in terms of food exports, religious investments, and a host of other trade efforts in addition to its security ties to the Popular Militia Forces and some elements of the Iraqi security forces. Some of these gains have made Iran unpopular, but many are seen as necessary. Iranian investments and exports of food and manufactured goods have expanded Iran’s influence well beyond an effort to influence the Iraqi security forces and the Shi’ites and Kurds in government.

Iran has also skillfully played up U.S. statements about a possible withdrawal and the substantial rise in ISIS terrorist activity over the last six months. U.S. and Arab aid might well be able to counter Iran if there were a sustained and coherent effort, but so far there are only words and little substance.

In contrast, the U.S. is doing little by way of civil and security aid. It seems to rely on its role in helping to defeat ISIS to win Iraqi support, claiming a level of victory over ISIS that the recent surge of ISIS terrorism clearly shows it did not win, and issuing uncertain messages about U.S. withdrawal. At the same time, Iraqis see that the U.S. is focusing far more on Iran’s efforts in the Gulf than on Iraq’s needs. If the U.S. continues to do this, Iran may eventually be able to dominate Iraq’s security forces and find a new major economic partner.

Iran will benefit most if it can establish influence over Iraq’s Sunnis and Kurds as well as over Iraq’s Shi’ites. Even if Iran divides Iraq in the process of gaining influence over Iraq’s Shi’ites, Iran only needs the kind of influence that would allow it to dominate the Shi’ite eastern portions of Iraq, and to maintain access to Syria through the Shi’ite and lightly populated Sunni areas in Southwestern Iraq to keep supporting Assad and the Hezbollah. It does not have to “win” all of Iraq, and might even benefit from exploiting Iraq’s sectarian and ethnic tensions.

U.S. Strategy Must Focus on Iraq as Well as the Gulf

The U.S. currently seems to lack an effective approach to political, economic, and national military building in Iraq, although the lack of a credible set of long-term strategic goals in the region goes back to the Bush and Obama Administrations.

One of the few areas that the Bush, Obama and Trump Administrations have in common is that none seem to have focused properly on the long-term strategic goals the U.S. should pursue in the Middle East and the Gulf. None of these Administration ever really made it clear what the desired end state of U.S. policy in the Gulf should be in grand strategic terms, or how the U.S. could credibly achieve it.

Events have made it brutally clear, however, that the goal of U.S. policy should not be withdrawal or minimizing the cost a U.S. presence in blood and dollars without regard to the ultimate impact of such decisions. The U.S. objective should be to achieve some form of stable peace that can help other Arab security partners achieve enough unity to eventually provide regional security with only limited U.S. military support. It should be to help find some stable answer to the fighting in Syria and Yemen. It should be to counter any direct Iranian military threat to the secure flow of petroleum exports out of the Gulf, and to find some way to create an even more effective JCPOA while putting Iran on the path towards development instead of a regional arms race.

In very practical terms, the U.S. must also recognize that a strong and independent Iraq is the most immediate key to creating a stable balance of power in the Gulf. The U.S. needs to act now to give Iraq’s stability and development at least the same priority that it does to securing maritime traffic in the Gulf and dealing with the near-term military threat from Iran.

Anthony H. Cordesman holds the Arleigh A. Burke chair in Strategy at the Center for Strategic and International Studies in Washington, D.C. He has served as a consultant on Afghanistan to the United States Department of Defense and the United States Department of State.
Anthony H. Cordesman

Anthony H. Cordesman

Former Emeritus Chair in Strategy