World Affairs

Trump is Pushing Iran into Russian Arms

The most important consequence of the Bush demolition of the Iraqi state has been the reemergence of Iran as the most influential power in southwest Asia. The core of southwest Asia is now a vast zone of Iranian influence that General Suleimani ominously calls the “Greater Persian Gulf region.” Iran is now the dominant foreign power in Lebanon, Syria and Iraq, and has significant influence in Yemen and Afghanistan as well. With thousands of Iranian troops fighting in the Levant, Iran is projecting its power further west and more deeply than at any time since the peak of Safavid power in the seventeenth century.

Part of the reason is simply that Iran is arguably the most powerful state in the region. Figure 1 shows the distribution of war potential in the Middle East. All data is represented as national shares of selected power resources of the regional powers. Iran has a population of 80 million, a close second to Egypt’s 85 million. Its economy is comparable in size to Turkey’s and Saudi Arabia’s (although the latter is mostly income from oil sales on the global market and is not reflective of national capabilities). Iran has proven oil reserves of 160 billion barrels, second only to Saudi Arabia’s 269 billion. Its endowment of arable land is second only to Turkey’s. Most astonishingly, some 269,000 Iranians graduate with degrees in engineering or the sciences every year compared to just 212,000 in the rest of the regional powers combined.

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Figure 1. Distribution of war potential in southwest Asia. Source: CIA, World Economic Forum. 

Israel is barely visible in the spider chart of war potential—a major flaw of these metrics. Israel punches dramatically above its weight for a number of reasons. First, Israel is a settler colony of the crème de la crème of Europe. Perhaps as a result of sustained selection on cognitive ability in medieval Europe or the survival effect of the liquidation of the bulk of European Jewry (smarter Jews presumably escaped at higher rates than dumber Jews from the Nazis), Ashkenazi Jews have the highest IQs of any ethnic group ever recorded. Not coincidently, Jewish people are massively overrepresented among Nobel Laureates. Combined with the traditional Jewish emphasis on education (with universal literacy probably as early as the second century CE), the per capita skill-set and knowhow of the Jewish state has no counterpart anywhere else in the world. Second, Israelis are far more willing to fight for the flag—a very important factor in warfighting capabilities since the rise of nationalism at the end of the eighteenth century—than any other nation for obvious historical reasons. Third, like Prussia in the classical European balance of power, Israel’s geostrategic position has led to the development of a highly effective operational art of war that has made it into a modern day Sparta. Surrounded by hostile states and with neither the resources nor the manpower to win long, drawn-out wars of attrition, the militaries of both states cultivated an art of war that sought to front-load conflicts and seek the decisive victory. Fourth, Israel has successfully cultivated a close security relationship with the unipole—in no small part due to the influence of American Jewry. This has given Israel greater access to advanced weapons and military knowhow than any other regional power including Turkey (even though Turkey, unlike Israel, is a member of Nato).

Still, modulo the special case of Israel, Figure 1 provides a good approximation of the war potential of regional powers in southwest Asia. It shows that Iran has the most balanced portfolio of intrinsic power resources in the region. Saudi Arabia, by contrast, is a pure petrostate. Iran’s population is 2.7 times as large as Saudi Arabia’s. It has 5 times as much arable land, 4 times as many graduates, and produces 6.7 times as many engineers and scientists every year as Saudi Arabia. The Kingdom has been able to access and sell—with foreign expertise and knowhow—a much greater portion of its oil deposits and has, as a result, accumulated considerably greater financial resources than Iran.

Saudi Arabia has tried to convert its financial firepower into military might by spending gargantuan sums of money on weaponry. Figure 2 displays the real military spending of the regional powers as well as the real price of crude. (We start the clock in 1971 when the British left and the gulf RSC emerged.) The salafi oil monarchy is by far the biggest military spender in the region. Since 2003, Saudi military spending has grown rapidly along with the price of crude to reach levels dramatically higher than other regional powers.

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Figure 2. Military spending by regional powers in southwest Asia. Source: SIPRI.

But it is extremely difficult, if not outright impossible if other ingredients of national power are lacking, to convert financial resources into warfighting capabilities simply by spending giant sums of money. The most important determinants of national warfighting capability are after all the size and skill-set of the populace and its willingness to fight for the flag of the nation-state. The Saudi populace is much smaller, much less skilled, and not nearly as motivated to fight for the flag as that of Iran. This is why a war between Iran and Saudi Arabia will be pretty much a one-sided affair. However, since Saudi Arabia is a US protectorate it is not at risk of being conquered by its stronger neighbor. Due to the presence of the US pacifier, security competition in the bipolar gulf region has instead been projected onto regional playing fields.

The dominant story of the region since 2003 has been the expansion of the zone of weakness. Three hitherto strong states of the region, Iraq, Syria, and Libya, have joined Lebanon, Palestine, Yemen and Afghanistan (the last is on the border of southwest and south Asia) as the playing fields of the regional powers. The regional players are Iran, Saudi Arabia, Egypt, Turkey, and to a lesser extent Israel. Although each regional power has their own particular security interests, the object of the regional game is to secure the orientation of weak states, or if there is no central authority, to secure influence in the polity or security zone by bankrolling and arming local security actors. Even more important than the push factors of regional security competition are the pull factors of sub-state actors seeking patrons. These features are manifest in the Syrian war but are no less true of other parts of the zone of weakness.

Some players are more in demand than others. No one except the Phalangists wants to be caught hobnobbing with the Israelis. Even the Kurds are tight lipped about their security cooperation with the Jewish state. More generally, transnational identities allow states in the region to mobilize opinion across borders. Sunni Arab groups, including many salafi jihadists, look to Saudi Arabia and the other Sunni Arab oil monarchies for support. Shiite actors seek Iranian support. Due to the rise in sectarian temperature—most dramatically as a result of the Syrian war—regional Sunni Arab actors, like the Palestinian resistance groups Hamas and Islamic Jihad, that used to be Iranian clients have pulled back. On the other hand, actors that were barely Shiite, such as the Alawi regime in Syria and the Houthis in Yemen, have become Shitte, and pushed further into Iranian arms. So the rise in sectarian temperature cuts both ways.

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Figure 3. The regional game.

When the Syrian uprising began, Saudi Arabia saw a major opening to wrestle away Syria—a state that is central to the Sunni Arab imaginary—from the Iranian orbit. Weapons, money and fighters poured into the warzone through the Turkish rat line. Much of the flow originated in the oil monarchies and went to salafi jihadist groups such as ISIS, JN and Arhar al Sham. But the Iranian-Hezbollah intervention prevented the fall of Assad. Once the Russians intervened on the regime’s side, the great Saudi dream of rolling back Iranian influence in the Levant became tenuous. With the fall of Aleppo to the regime’s forces, all such hopes were dashed.

Meanwhile, the US-Saudi puppet in Yemen had been displaced by the Houthis with the support of the former Yemeni president (a Sunni). Saudi Arabia’s aggressive young leader Mohammed bin Salman al Saud (MBS), responded by launching an air war with the logistic and diplomatic help of the Obama administration.  There was a lot of brouhaha about Iranian influence in Yemen; Saudi Arabia’s backyard. But Iranian influence was always more imagined than real. The Houthi political movement, in fact, enjoyed broad-based, cross-ethnic support and was neither simply a Shiite group nor an Iranian proxy. The main consequence of the Saudi terror campaign in Yemen was to give a boost to Al Qaeda in the Arabian Peninsula (AQAP), one of the most dangerous and capable salafi jihadist groups in the region. (Yemen was not the only place where the main result of Saudi meddling was to strengthen salafi jihadism.)

Lost in the regional narrative was a potential gamechanger. This was an alliance between Russia and Iran—something that has never obtained ever before in history. Even though both were simply fighting together to save the Assad regime and there were no plans for a broader alliance, there was always the potential for one. The Obama administration was smart enough to know that it would not be in the US interest if Iran acquired a rival great power patron. (Obama went so far as to say that the Saudis and the Iranians would have to “share the region.”) As long as the United States could keep the door ajar just a little bit, Iran had more to lose from defying the Western alliance than gaining a great power patron.

In this trip, Trump has slammed the door in Iran’s face. It may further the interests of the oligarchs connected to the Trump White House. But it makes no sense in terms of US interests in the region. We should not be surprised if Iran gets closer to Russia and the Ruskies extend their influence in the Middle East as a result. I am not suggesting that this is a certainty. Russia has so far pursued defensive and limited aims—basically shoring up the Assad regime. But that is no guarantee that the Kremlin will not exploit this opening.

There was something deeply shameful about Trump declaring Iran to be a sponsor of terror whilst standing in the heart of terror finance; entirely bogus claims based on Iranian patronage of Hezbollah and Hamas, which for all their Islamic rhetoric are nationalist resistance groups; not Islamic terrorists. Islamic terrorists, like the one who murdered young kids in Manchester this week, are without a single exception salafi jihadists who are bankrolled by financiers in the permissive jurisdictions of the gulf oil monarchies that Trump just declared his eternal love for. In fact, Iran is the one Muslim power that is guaranteed to be an ally against salafi jihadism. If the United States was serious about tackling salafi jihadism, the place to start is to put the oil monarchies is a financial straightjacket—all financial flows out of the gulf ought to monitored by a terror finance task force set up by Western intelligence agencies.

It’s too easy to blame the Trump administration for following policies that are so manifestly against the US and Western interest. The truth is that the blame lies on a broad swath of the foreign policy community—including Democrats. Somehow the debacles of the Bush administration have failed to kill the rogue states doctrine that is at the root of America’s failed foreign policy.

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World Affairs

Did the Saudi Government Secretly Support ISIS?

On August 17, 2014, Clinton wrote to John Podesta, then Counselor to the President and later her campaign chair, outlining the intelligence on ISIS and laying out her policy position on how to deal with the challenge. Most of the stuff—on FSA, peshmerga, Turkey and so on—is clear from open sources but there was one particular bombshell. She claimed that the governments of Qatar and Saudi Arabia provided clandestine financial and logistic support to ISIS. Here’s the full paragraph:

Armed with proper equipment, and working with U.S. advisors, the Peshmerga can attack the ISIL with a coordinated assault supported from the air. This effort will come as a surprise to the ISIL, whose leaders believe we will always stop with targeted bombing, and weaken them both in Iraq and inside of Syria. At the same time we should return to plans to provide the FSA, or some group of moderate forces, with equipment that will allow them to deal with a weakened ISIL, and stepped up operations against the Syrian regime. This entire effort should be done with a low profile, avoiding the massive traditional military operations that are at best temporary solutions. While this military/para-military operation is moving forward, we need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region. This effort will be enhanced by the stepped up commitment in the KRG. The Qataris and Saudis will be put in a position of balancing policy between their ongoing competition to dominate the Sunni world and the consequences of serious U.S. pressure. By the same token, the threat of similar, realistic U.S. operations will serve to assist moderate forces in Libya, Lebanon, and even Jordan, where insurgents are increasingly fascinated by the ISIL success in Iraq.

Now it is well understood that private donors in the gulf, including and especially rich Saudis and Qataris, have provided significant funding for ISIS. But Clinton said quite explicitly that the Saudi and Qatari governments were providing clandestine support. If the claim is true then this would be the greatest national security scandal in US history. For the United States government has gone out of its way to portray the Saudis as a valuable partner in the fight against ISIS.

The US has also gone out of its way to support the Saudis’ aggressive foreign policy in the region. Despite knowing that the Saudi terror bombing of Yemen would strengthen AQAP, the administration has provided blanket operational support for the air war. In Bahrain, the administration quietly acquiesced to the Saudi intervention to quell the uprising of the island’s majority Shia against the Al Khalifa. In Syria, the administration has repeatedly signaled its support for Saudi-backed salafist insurgents—often described as Western-backed—despite considerable concerns about their sectarian and ideological agenda.

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President Obama and Saudi Deputy Crown Prince Mohammed bin Salman

The systematic appeasement of the Saudis is presumably meant to mollify Saudi anger about US policy vis-à-vis Mubarak and the nuclear deal with Iran. But if it is publicly established that the Saudis directly supported ISIS, that would completely undermine domestic support for the US-Saudi alliance. Put simply, Saudi Arabia would become a pariah. Instead of talking about strengthening the alliance, we would be talking about containment. So this is an issue of considerable importance.

ISIS poses an existential threat to Saudi Arabia since the self-styled caliphate rejects the Saudis as the legitimate protectors of the two holy mosques; a job which would naturally fall on the caliphate if one were in existence. The Kingdom has also been the target of ISIS and its predecessors. The Saudis could conceivably use ISIS as a bludgeon against Assad and the Iranian-dominated regime in Baghdad. But such a policy would come with grave risks.

Even supposing that the Saudis could stomach the risk and bankroll ISIS, the second part of the claim is even less credible. For if US intelligence was aware of Saudi clandestine support for ISIS, that information would be extremely difficult to suppress. It is hard to imagine that the administration would bank on keeping the lid on this explosive affair. Indeed, if it ever came out it would ruin the career of every single person involved in the conspiracy to cover up a matter of such grave national security interest.

A much more credible interpretation is that Clinton was being flippant. What she meant to say perhaps was that the indiscriminate support provided by the Saudis and the Qataris (as well as Turkey) for the insurgency against Assad was helping ISIS. Specifically, that the flow of weapons and funds from the gulf regimes to the insurgents was ending up with ISIS. There is considerable evidence to suggest that weapons and monies meant for other insurgent groups ended up in ISIS’ hands through raids and defections. The addition of a single word, inadvertently, would rehabilitate her claim:

While this military/para-military operation is moving forward, we need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are [inadvertently] providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region.

I believe this is the correct interpretation of the email. If I am wrong and Clinton’s words can be taken literally, then we may be facing a true game-changer in the Middle East. But pending further revelations, it would be unwise to give it much credence.

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World Affairs

A Confession of Sorts from Saudi Arabia

Saudi Arabia has threatened the United States with grave consequences if lawmakers were to pass a bill revoking part of a 1976 law that gives foreign nations some immunity from lawsuits in American courts “in cases where nations are found culpable for terrorist attacks that kill Americans on United States soil.”

The Saudi threat amounts to a de-facto confession that Saudi officials or princes had ties to Al Qaeda at the time of the September 11, 2001 attacks. Why else would they panic and issue ultimatums? Even if it was not senior officials and just some energetic royals, they might have good reason to worry. US courts could be persuaded that senior princes are part of the Saudi monarchical state—there is surely legal precedent from the nineteenth century.

After Saddam’s invasion of Kuwait in 1990, bin Laden met with King Fahd and offered to raise a mujahideen army to defend Saudi Arabia. The monarch rebuffed his offer and instead accepted a deployment of US forces (Operation Desert Shield). It was at this point that bin Laden turned on the Al Saud, against whom he raged for two years before being exiled to Sudan. But there is some evidence to show that Saudi intelligence continued to maintain contacts with Al Qaeda during the mid-1990s. The question is: Did this relationship last into 2001 and beyond?

A priori, it seems unlikely that there was active support for Al Qaeda at the official level and in the upper echelon of the Saudi royalty circa 2001. But then, why the panic?

On the related, broader question of support in Saudi moneyed circles for Al Qaeda, and more generally, salafist jihadism, there is no doubt whatsoever. It is very well-understood that the bulk of the money powering global jihadism originates in the gulf monarchies, in particular, the Kingdom of Saudi Arabia.

Global jihadism does not grow in a vaccum. It is intrinsically tied to salafism. Indeed, global jihadism is synonymous with salafist jihadism. And it is here that one finds the real challenge posed by Saudi Arabia. For the Kingdom is the principal propagator of salafi ideology worldwide.

The Saudi state has invested its vast oil wealth, and utilized its pivotal position as the host of the annual Muslim pilgrimage, to promote a vicious ideology that combines Sunni supremacism with puritanical fanaticism. The ideology demands a return to the version of Islam practiced under the first four caliphs. That is, it demands a return to the practice of the Jihad-State at Medina, before the caliphate moved to Damascus (and presumably got corrupted).

The innovation of the salafist jihadists is merely to point out the essential incompatibility between the Saudi state ideology and its de-facto alliances with the near, Zionist enemy and the far, Crusader enemy; and therefore to demand armed revolt instead of obedience to the Al Saud. This is an argument that the Al Saud are quite possibly rigged to lose. Indeed, if there is a state that is not already engulfed in a civil war that is at risk of being overrun by ISIS, it is Saudi Arabia. No one is more at risk; not even Pakistan.

As for the Saudi threat to sell their hoard of US Treasuries. First of all, Saudi Arabia does not have $750 billion as the paper of record alleges, it has slightly less than $600 billion in reserves. Second, if the Saudis were to dump all $600 billion in Tbills, it would not make much of an impression: It would amount to less than 1 per cent of total dollar credit outstanding (about $60 trillion). Even as a share of daily funding in the wholesale market (about $4 trillion onshore and an even larger amount offshore), it would be a drop in the bucket. At best, it would make for an interesting day in global money markets.

Third and lastly—and this one is the kicker—it would be outright beneficial to the global financial system which has had a structural shortage of Tbills for years! Indeed, it would bring down the premium now being paid for Tbills in Europe. Figure 1 shows euro/dollar cross-currency basis swap spreads which capture the liquidity premium. (When they fall below zero it implies that there is a shortage of Tbills.)

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Figure 1: Euro/USD cross-currency basis swap spreads (Source: ECB).

The bigger issue at stake here is the future of the US-Saudi relationship. It is time to go back to basics: It is in the US interest to protect the Kingdom from external aggression. But it is not in the US interest to go along with the Al Saud’s regional adventures (re Yemen). And it is certainly not in the US interest to watch the Saudis propagate their vicious ideology worldwide. The United States needs to stand firm on these issues. To that end, Congress should pass the 9/11 bill and the Obama administration should shelve its ill-thought opposition to the same.

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World Affairs

A Dangerous Inflection Point in the Syrian War

Tensions between Russia and Turkey have escalated dramatically in the past few weeks, so much so that direct military confrontation cannot be ruled out.

Under the cover of Russian air power, Assad’s forces have almost completely encircled Aleppo. Assad plans to repeat the siege-and-starve tactic he followed to regain control of Homs City is May, 2014. The coming siege has prompted some 150,000 residents to flee towards Turkey, which has closed its border to the refugees.

US-backed Syrian Kurds are hoping replicate the achievement of the Iraqi Kurds and forge a statelet along the Syro-Turkish border. YPG forces exploited the opportunity opened up by regime gains north of the city to seize territory held by Turkish-backed rebels near the border, including the Menagh Airbase. Ankara responded by shelling their positions; ignoring US calls for restraint. Moscow has been effectively supporting the YPG by conducting airstrikes on non-Kurdish rebels in the region.

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Aleppo City is held by a motley collection of some fifty odd Turkish, Saudi and Qatari-backed rebel groups. Most of these groups are no more than neighborhood militias with dozens or hundreds of fighters. The biggest is Turkish-backed salafist outfit Ahrar al-Sham, which has tens of thousands of fighters and controls the strategically important Bab al-Hawa crossing, the only remaining line of communication into Aleppo.

Ahrar competes with Jabhat al-Nusra (JN) for leadership of the Aleppo rebels. JN controls the main water and power plant in the city and enjoys a degree of leverage over other groups.  It has disarmed and absorbed at least three US-backed groups in the past year.

Both JN and Ahrar have a significant presence outside the city and are likely to survive and perhaps even make strategic gains as a result of the siege. Other US and Turkish-backed groups are at risk of annihilation and absorption by the big two. The same goes for the Saudi-backed Jabhat al-Shamiya and Jaysh al-Mujahideen.

That the loss of Aleppo would be a turning point in the proxy war is not lost on the Saudis. Mohammad bin Salman, the 30-year-old Deputy Crown Prince and Defense Minister, is “willing to take military, financial and political risks in order not to fall behind in regional politics,” according to German intelligence.

The Kingdom’s aggressive new foreign policy was on display in Yemen, where the Saudis rashly intervened to push the Houthis back to the hills and restore their man to the helm. It is on display again in Syria: Riyadh is deploying fighter jets to the southern Turkish airbase of Incirlik.

Turkey is considering a military intervention in northern Syria. This is not because Ankara has any illusions that it can put up a fight with Russia, with or without Saudi help. Turkey is counting on Article V of the North Atlantic Treaty which states that “an attack on one Ally shall be considered an attack on all Allies.” In other words, Turkey may be betting that the United States will deter Russia from directly attacking its Nato ally.

The situation is starkly similar to the July Crisis. Back then, German guarantees prompted Austria to attack Serbia, a Russian protectorate. Today, US guarantees may prompt Turkey to attack Syria, a Russian ally.

It is time to diffuse this dangerous confrontation. It would be extremely damaging to US credibility to back-off after the event. On the other hand, unlimited guarantees to Turkey could embroil the United States in a major military confrontation with Russia that would serve no conceivable US interest. The US needs to inform Turkey post-haste that the United States is not going to war to protect Turkish interests in Syria.

 

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Markets

Careful What You Wish For

 WTI

For the US stock market, good news is bad news. The Fed is waiting for the recovery to strengthen to exit the zero lower bound. When it does, we’ll see a market correction and an end to the current financial boom driven by yield-seeking investor behaviour. The magnitude of the correction will depend on the balance between the extent of the bubble in asset prices on the one hand, and the continuing positive impact of the Oil Price Counter-Revolution on the other. Let’s not get this wrong: the expectation of a genuine recovery in the non-financial economy, such as it is, is almost entirely driven by the near-collapse in the price of energy.

The Oil Price Counter-Revolution is better than a Middle Class tax cut, which does not affect the poor or the really rich, both of whom don’t pay much in income tax; but whose consumption is now a larger share than that of the Middle Class. It is a decline in the cost of making every input except people and capital for everyone except the energy firms. Since oil is used in almost every single industry, the impact is very broad, making the oil price the dominant variable for the economy. Hence, the implication of a genuine recovery. Which brings us to what is happening in the energy markets.

The cost of producing solar and wind energy has collapsed to levels last prevailing in the cost of making energy from oil and natural gas in early 2014. The shale boom has continued apace, pushing down the price of gas in the United States to a third of that prevailing in Europe, and a fourth of that in Japan. US tight oil production is increasing relentlessly, so much so that the United States is likely to briefly replace Saudi Arabia as the largest producer of crude. The Kingdom declined to accept lower quotas in the last Opec meeting. The Saudis reckoned that a brief period of benchmark prices in the sixties (Brent is now at $62 and West Texas Intermediate at $58; both were above $100 for a long time) will drive many American tight oil producers with their high costs out of the market, and undermine Iran. It is wrong on both counts.

Brent

Some of the impact of higher than anticipated gulf production will be absorbed by a divergence between Brent (Eurasian) and West Texas (American), thereby softening the impact on American producers. And unlike petrostates with their fiscal burdens, private American oil firms can survive at much lower margins by cutting costs; expanding capacity when prices revive. A prolonged period of cheap oil will lead to a consolidation of industrial structure, with marginal firms being absorbed by their stronger rivals. But it is unlikely to diminish capacity in the long term. Since tight oil fields get exhausted in a short year or two (regular fields like those in the gulf last more than a decade), American oil production is much more flexible than Opec production in the medium term. Oil firms can easily postpone capacity expansion and let existing capacity erode, thus responding relatively quickly to price signals. Since capital is cheap and credit easily secured, firms do not face a financial constraint on capacity expansion either. And if prices continue to slide, they can shelve plans to expand capacity and buy back their own shares to maintain their stock prices. The United States has too deep of bench of innovative oil firms. The Saudis cannot eliminate American competition by aggressive price-cutting.

Aggresive price-cutting can certainly hurt Iran. But that is at least as likely to backfire geopolitically on the Saudis as otherwise. Iran is already in dire straits economically due to the sanctions regime. Further pressure will quite likely undermine the hawks who are holding back on a nuclear deal with the United States. American and Iranian geopolitical interests have converged remarkably since the rise of the Islamic State. Both now very nearly want the same thing in Iraq and Syria. A greater willingness to compromise on the part of the ayatollahs, a likely result of great fiscal pressure, is very likely to clench the deal. Iranian businessmen are already rubbing their hands.

More generally, the revival of American oil production has dethroned Opec. The cartel no longer enjoys the extraordinary power it wielded in its heyday. If Iran returns to the market and Western capital underwrites an expansion of Iranian capacity, Opec itself would become bipolar. Without a thaw in Saudi-Iranian relations, it would become defunct. In either case, if Iran returns to the market in force, Saudi Arabia’s status as the swing producer will assuredly be undermined. And with it perhaps, the leverage that the Saudis have enjoyed against their protector since the Islamic revolution.

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