Iran Conflict Brief: A 'Tacit Bargain' Protecting Gulf Energy

**Daniel Sternoff** (0:04)
Events in the Middle East are changing quickly, and the complexities of understanding the global energy landscape grow deeper by the hour. We are cutting through the headlines to bring you real-time analysis. Join me as we talk to leading experts on the latest developments in the region and what it means for the rest of the world. Welcome to the Iran Conflict Brief, a limited edition of the Columbia Energy Exchange podcast at the Center on Global Energy Policy at Columbia University devoted to the current crisis in the Gulf. I'm Daniel Sternoff, a senior fellow at the Center on Global Energy Policy.
We are recording this podcast on Monday, March 16th, at noon in Washington DC, 8:30 PM in Tehran and 8 PM in Abu Dhabi and Riyadh. I'm joined today by Richard Nephew, a senior research scholar at the Columbia Center on Global Energy Policy. Richard has held a range of senior roles in the US government over the past two decades, including, but certainly not limited to, Deputy Special Envoy for Iran, Principal Deputy Coordinator for Sanctions Policy at the Department of State, and Director for Iran at the National Security Council. Richard is the author of The Art of Sanctions, and there is no better colleague to discuss Iran, geopolitics and their intersection with energy markets, economic statecraft, nuclear topics, and sanctions. Good morning, Richard.

**Richard Nephew** (1:33)
Morning.

**Daniel Sternoff** (1:34)
So, we are now into week three of a war that is taking a rising toll on global energy markets. Middle Eastern upstream oil production shut-ins are now approaching 10 million barrels per day, and almost half that amount, 5 million barrels per day of downstream refinery operations have halted. Last week, we saw the largest SPR release in history at 400 million barrels, which have most helped blunt the further rise in Brent oil prices over $100 per barrel. But limitations on the flow rate means that strategic stockpiles might at best be able to meet a fifth of ongoing daily disruptions. And, of course, 20% of world LNG remains shuttered. The world energy system is now in a race against time. Disruptions of a few weeks will leave a tighter market, and some scars, but a path to normalizing flows. But if disruptions at these levels extend deep into next month, it's pretty likely we're going to need significantly higher prices to start forcing demand lower. Unfortunately, events over the weekend, it did not look like we see a swift conclusion. During the weekend, the US attacked a broad range of military targets at Kharg Island, Iran's most important oil export hub. But President Trump went out of his way to stress that he was not currently targeting Iran's oil infrastructure there.
Iran, nonetheless, retaliated by attacking the UAE's oil port of Fujairah, a key Emirati hub for flows that bypass Hormuz. Separately, a Marine Expeditionary Unit is being dispatched from Okinawa to the region, and the Commander-in-Chief threatened yesterday that he could hit Kharg Island again just for fun. So Richard, on a tactical level, the US-Israeli campaign seems to be significantly damaging Iran's capabilities to project hard power. But on a strategic level, the Strait of Hormuz is basically shut, and the very small numbers of tankers that are getting through seem to be Iranian oil destined for China, or somehow they're tankers that are being granted safe passage by Iran, as appeared to be the case of two LPG tankers heading to India under Indian naval escort. Do you agree with the assessment that Iran strategically holds the upper hand here?

**Richard Nephew** (3:39)
Well, it's a good question. It's a good time to step back and think about it a little bit.
I think you can approach this on a couple of levels. On the straightforward level, would you rather be in Iran's shoes or the American shoes right now? I don't think anyone would say, I would rather be facing the kinds of choices and the kinds of risks and the kinds of threats that they're facing in Tehran. I think that speaks to the United States being able to still to use force in a very concerned and directed and effective way, its partnership with Israel to be able to do so, the degree to which you're still having missiles intercepted, drones interception and so forth. All that speaks to the United States still having both a tactical and strategic upper hand. But then we got to think a little bit about what our objectives are. I think at the most straightforward level, the US has said its objective is denying Iran the ability to project power outside of its borders. It may be that over the long arc, this campaign will be successful there. Right now, you'd have to say it's not been. Iran is still able to utilize the long-husbanded resources that they have to threaten access to the Strait of Hormuz and thereby global energy supplies, to threaten financial centers in Dubai, to threaten even just population centers, whether they're in Israel and Gulf of Arab States or so forth, and certainly US forces operating too. So more than anything, I think what the current situation shows is that Iran still has the ability to throw its weight around, to throw a force around, and to try to impose real costs on the United States for this campaign. The real question at this point is, what is the durability of the US response? What are the countermeasures that could be employed, and whether or not they'll be effective in any near-term basis. Right now, you'd have to say, they're not being.