America’s Asian Allies Prepare for a U.S. Retreat | Silk and Steel

**Carl Zha** (0:01)
Hello, and welcome to another episode of the Silk and Steel Podcast. I'm your host, Carl Zha.
Today, I have back on my show, Dr. Warwick Powell from Australia. Hello, Warwick. Welcome back to my show.

**Warwick Powell** (0:15)
Great to be with you again, Kyle.

**Carl Zha** (0:18)
We have a lot to talk about, as usual. The war in the Gulf is entering another phase. Iran just said that they will refuse to negotiate with Donald Trump and US administration anymore, and they intend to wait out Donald Trump's remaining turn, which means the Strait of Hormuz will be closed until 2028
Is that your expectation? Did you expect the war to be a prolonged one?

**Warwick Powell** (0:58)
Absolutely. I wrote a while back, actually, Carl, on my sub stack an article looking at the dynamics between the escalation trap, which is the Robert Pape thesis, together with arguments about Trump being incentivized to bring a quick end to the war and get out, versus other dynamics at work, which is including the much broader foreign policy posture, I guess, of the American permanent state around the idea of the Greater Israel Project. And of course, you add into that the overriding political sensibilities leading into a midterm election and the need for what we call a decent interval, which is a gap between recognizing military defeat and actually doing something about it. And that decent interval problem is one that manifested itself in Vietnam, when the American administration, people deep inside the administration actually knew that the United States couldn't win that war, but they couldn't get out either for fear of losing reputation, et cetera, et cetera. So you bundle all of that together, and the chances of a rapid resolution to this conflict is very, very slim. The other thing to remember is that this is a conflict many decades, not only in the making, but in fact has been on and off for many decades as part of a continual attempt, I guess, to reshape the very nature of the Persian Gulf and the geopolitical arrangements there. And going back 30 years or so, there was a clear American strategic intent to prosecute a clearing strategy, to clear out all the obstacles towards being able to lay the groundwork for a greater Israel. And the last major obstacle of that was the Iranian state.
And so that project in that sense hasn't ended yet. The fact that the United States has actually suffered, what I would say is a strategic defeat. And it's a strategic defeat for the United States because it was not able to achieve any of its core objectives via military means.
It actually recognizes that it can't achieve those military objectives. And it's also had its position in the Persian Gulf severely depleted. And in fact, they've been by and large, pushed out of the Persian Gulf for the time being. So in all major respects, the United States for now has suffered a strategic defeat. It doesn't mean the end of the war.
But it is forcing the Americans to re-calibrate. And that's precisely what they're doing. And of course, at the same time, because it is a process that involves more than one actor, the Americans don't get to dictate all the terms, Iran and others are actually re-calibrating their own posture towards the conflict that's just been, the current circumstances and their expectations about what might unfold over, not only the next three months, but perhaps even as you imply the next three years.

**Carl Zha** (4:14)
Yeah, that will have great implication for the global economy because up to now the Persian Gulf hold about 20% of the world's crude oil production and also about 20% of the world's natural gas production.
And as we found out, the modern world runs heavily on products derived from hydro or those hydrocarbon products. What do you see going forward, the impact on the global economy will be as a war drags on?

**Warwick Powell** (4:53)
Part of the assessment of what is likely to unfold depends upon how we evaluate firstly, the aggregate market impact of what's been going on in the Persian Gulf, as well as offsetting moves made elsewhere, particularly in the United States, and to some extent, what's going on in Russia. And the ability of economic systems and enterprises around the world to adapt to a world in which there are supply side shocks when it comes to oil, but not just oil in general, but the derivative products that come from it. Because it's the derivative products that ultimately feed their way into different kinds of economic activities, and different kinds of oils from different parts of the world, are better suited for the manufacturing or the distilling of particular kinds of usable energy products. I think one of the interesting things that we need to watch very, very closely is actually what's going to happen in the diesel market. Diesel is the product that is manufactured best actually from the crude oil, from the Persian Gulf and also from the Urals, the Russian crude variety. It's actually not particularly efficient to get diesel from the crude from the American shale basins. The American system is actually perfectly fine for the manufacture of gasoline, but it's actually not well suited to the manufacture of diesel and jet fuel. For that, it actually does need to import oils from other parts of the world, either from the Persian Gulf or some oils that they can blend from places like Canada. Okay, so the thing to watch out for is actually what's going to happen to diesel first and foremost in the United States. Diesel is also going to be an issue for other parts of the world for exactly the same reasons. Okay, so I think it's not just a question of aggregate oil shortages, it's actually very particular kinds of end products where we're going to experience more shortages than not. These products by the way go towards activities where the elasticity of demand, the price elasticity of demand is actually not particularly high.