Greg Brew on Surging Energy and the 'Strategic Trap' of the War in Iran | Odd Lots

It relates to Iran's broader strategy, not only its strategy for surviving this war, but its strategy for improving its deterrence and reducing the possibility of this happening again of future attacks. The bigger scenario that the Iranians are more concerned about is a scenario where Iran turns into Lebanon or Iran turns into Syria, a country that you can just bomb, that Israel can just bomb whenever it wants to. They're very, very concerned about that becoming the new status quo. So that is what's driving their strategy. They want to restore deterrence. And their way of doing that is indicating to everyone the United States, Israel, the GCC, but the entire world that attacking us is not worth it, that we will respond by imposing more pain, more costs on you, and you can impose on us. The Iranians love to demonstrate this. They love to talk about this. And I think they are illustrating it, that they are more resilient, that they can take the hit, that it doesn't matter that the U.S. and Israel have air superiority over Iran.

Right. And, you know, for the US, obviously a lot of this translates into higher prices at the pump for some of the region, region in Gulf countries. I mean, it's just, it's GDP catastrophe, right, in the sum of the estimates for what some of the countries are expected to see a reduction in GDP. I think I've seen numbers like 15%, etc. I mean, we're talking about, you know, depression level declines and so forth. And so the degree to which this drives a serious wedge between Gulf countries and the United States is, of course, obviously a big part of the story here anyway. And of course, that makes the logic of the strikes, right? I mean, this is a, that makes Iran's logic seem very clear, drive a wedge between us and its friends in the region and so forth. And so anyway, we need to understand both better just how serious this damage is, the long term fallout, because this is very important for the economic story. And then the way to think about this damage in the context of war strategy itself and what constitutes success for Iran here as it tries to defend and how all of this is actually playing on the ground in Iran, because, of course, we don't have very good insight at any moment in time into domestic Iranian politics.

Hi, Joe. Hi, Tracy. Thanks for having me back.

It's definitely more than a handful.

So I think I'm shocked. I think I'm officially shocked after the events of the last 24 hours where you saw both Israel attack the South Pars gas field in Iran, which supplies 70% of Iran's gas supply. And then quite quickly, within hours, Iran responding by striking the Ras Laffan LNG processing facility in Qatar. But of course, over the last few weeks, we've seen widespread strikes on energy targets throughout the region and then, of course, the closure of the Strait of Hormuz, which, as you mentioned, and I've had very similar experiences to Rory in this way over the last few years, whenever anybody asked me, you know, is Iran going to close the Strait of Hormuz, I would say only as a last resort. Only in the event that the regime feels that its survival is being threatened. And, you know, most of the time I've been saying we're not there yet. You know, whatever crisis this is, it's not that bad. But this war, this attack was interpreted by Iran as a threat to its survival, a threat to the regime's survival. And it responded in a way that it has been saying it would respond for a long time. So I have been shocked. But if I were a better Iran and energy analyst, maybe I shouldn't have been.

Well, I think the kind of collective understanding initially was that even though the war began with Israel assassinating Supreme Leader Ali Khamenei, which incidentally, the Iranians kind of expected. They had been making plans for the last several months of what to do in the event that Khamenei was assassinated. But I think the collective understanding of the war initially was that it was going to be a short war because the United States and because President Donald Trump didn't want a long war. So there was this belief that, okay, things are bad, Iran has been attacked. It's being heavily bombed by the US and Israel. It's closing the Strait of Hormuz. But Trump is going to de-escalate and it's going to end like this. This isn't going to turn into a prolonged conflict. That's part of the reason why oil prices didn't really respond as aggressively initially as I think they've responded since. Why? You know, futures didn't move very much in the first week or so of the war because I think everyone was maybe in a state of shock and denial that the situation was as bad as it really was and that things were going to be wrapped up, things were going to be de-escalated. And I think on some basis that was, you know, that was stemming from historical experience, like the war between Iran and Israel last June was also very intense, but it ended very quickly with a very, very rapid cease fire that allowed oil prices to fall. And in the past, Iran had done aggressive things. It had fired missiles at Israel, it had fired drones, but usually in a calibrated kind of proportional way. And I think there was over the first week of the war, there was this belief that, oh, Iran is not going to go that far. Right. That they are going to ultimately, they're going to be deterred from being too aggressive. And I think on both sides, this understanding that Trump was going to de-escalate quickly and that Iran was going to be restrained. Both of those assumptions proved to be very inaccurate. And now that we're in the third week of the war, I think it's really settling in how bad this is, how bad this is going to be, and how much work it's going to take to de-escalate.

Sure thing. I mean, the only thing that I will say, the only thing that's somewhat more challenging for an analyst in my position, more challenging than diving into the psychology of the Islamic Republic is diving into the psychology of Donald Trump. But I'm going to give it a shot. Okay. So, yeah, again, going off of historical experience, here was an individual, a person who had been in the public eye for decades, who always seemed to be preoccupied by the price of gasoline. If you go back over the last 30, 40 years, Trump is always talking about gas prices, right? Keeping gas prices low. How gas prices, you know, reflect poor governance, poor economic performance. You got to keep gas prices low if you want to be successful. He talked about it a lot in his first term. He talked about it a lot last year coming up into this crisis. And then suddenly we're in the context of a war. Strait of Hormuz is closed. 20% of the global oil supply is being disrupted or shut in in some way. Gas prices are climbing to highs that we haven't seen in years. Oil is over a hundred. And then suddenly, Trump is acting like that doesn't matter. Like he doesn't care. It's curious. I think it comes down to a couple of things. I think it comes down to in this context, he is maybe more conscious of looking weak than taking the win and taking the short term win and seeing the economic indicators, the financial indicators swing back in his favor. I think the size and scale of this conflict, the fact that it's not just sort of the adventure in Venezuela or putting pressure on Russia, it's a war. There are, you know, dozens of US warships, hundreds of planes, thousands of US personnel, GCC states, allies of the United States that are under consistent fire. It's a big deal. And to take a win now would also, would not only, I think, expose the president to criticism in a way that maybe he hasn't been exposed over previous foreign policy adventures where he's always sort of managed to escape looking very tough, you know, looking very assertive. If he does back down right now, it feeds directly into the Iranians' narrative of victory, this sense that Iran is tougher, more resilient, more able to withstand pain, and that eventually they will outlast not only the United States, but more specifically, the US president. That is entirely what is driving Iran's strategy from the opening of the war.

There's been some good reporting on this. So I think we can accept it as fact, although it's irrelevant for the reasons I'll state. Going into this, there was a belief in the administration and perhaps a belief from the president himself that there was an opportunity in Iran to replicate the experience in Venezuela, that there was a way to kill Ali Khamenei, the supreme leader, and that in the wake of his death, a group of Iranian leaders would come to the fore and would pursue policies that aligned with US interests. There was a belief that that was possible. Now, the problem which they encountered immediately was that the individuals they expected to lead that political shift inside Iran were also killed alongside Ali Khamenei in the opening hours of the war. So the opening, the opportunity to achieve a Venezuela disappeared in the opening hours. Leaving the president, I think, and the United States with a problem regarding war goals. Now, they have done tremendous damage to Iran's military capabilities, missiles, missile stockpiles, missile productions, Iran's navy, as the White House loves to advertise, has been taking tremendous damage. So Iran is absolutely being weakened by this war. But I don't know if that's enough for the president to justify the war, the war scale, the economic cost, the risks that were associated if the war ends with just Trump saying we've weakened Iran. We're not going to have to deal with them again. That's insufficient because he is probably getting advice inside the White House and from the Pentagon that if the war ends now, Iran will likely rebuild. You know, they rebuilt the damage that was done to them following last year's war. They rebuilt most of that damage within six months. You know, probably take them longer to rebuild the damage from this war, but they will almost certainly do it also if the war ends now. Iran will leave, probably feeling emboldened, having felt that their strategy of targeting the strait, targeting GCC states worked. So if the goal is just to weaken Iran militarily, they've done that, but it's probably insufficient. Right now, what I imagine the president is thinking about is how, what can I do against Iran that allows me to claim a more decisive victory and offers me a politically and also strategically viable off ramp. The problem I think they're dealing with right now is that there are no good options to pursue that outcome.

Well, I'll avoid naming names because a lot of the think tank folks in DC are friends of mine. But I will say this. You know, the Secretary of State, Marco Rubio, likes to say this a lot. I think it's a line that he thinks conveys meaning and significance. I actually think he's right. There is a huge gap between the Iranian people and the Iranian regime of the Islamic Republic. There is overwhelming evidence to suggest that most Iranians don't support most of the policies that the regime pursues, both the social policies at home, very restrictive policies on how you can dress, how you can act, the kinds of businesses that cannot be operated. There are laws prohibiting co-ed activities. Increasingly, I should note that a lot of these laws are being flouted openly. People just aren't obeying them anymore and the regime is having a hard time enforcing them. More broadly, there's resistance to a lot of the policies the regime has pursued, backing foreign proxies or regional proxies like Hezbollah or the Houthis in Yemen. You know, spending money propping up Assad in Syria, spending huge amounts of money building up a nuclear program which resulted in incredibly onerous Western and US sanctions. And then just the general sense that, you know, there are elections in Iran, but they're not really free or fair. Lots of candidates that people would vote for are barred from running for office. There are politicians who have spoken out, too, on the subjects of reform and democratization. They are silenced. They're arrested or put under house arrest. So it's an incredibly, you know, restrictive political environment and one that a lot of Iranians don't support on the sort of broader ideological frame. There is a core of support for the Islamic Republic as a political experiment. There is still this group of people inside the country. It's hard to estimate precisely their size, but one estimate you can go on is when there are elections for president. For instance, there was one in 2020 for the super hard line candidate, the candidate who is extremely anti-US, who is all for doubling down on hijab and other tough social policies. That candidate usually gets 14 to 15 million votes. And when the regime has, you know, demonstrations, when there are official days of celebration, when they come out and they hold marches, very often, these marches are pretty well attended. People do show up. The regime can probably count on the support of a hard core of maybe 10 to 15 to 20% of the population. Okay. That's probably enough for them to stay in power. The other aspect of this, and you know, this is not a uniquely Iranian story. Decades of repression and monitoring political dissent, restricting the political environment. What that means is that there's really no organized political opposition inside Iran. There's no opposition candidate or opposition leader who's, you know, fighting the good fight. There are some individuals, but they're not really at the level that they could organize an alternative government. The other aspect of it is there are whole institutions that are built into the fabric of the Islamic Republic, the IRGC, the Islamic Revolutionary Guard Corps kind of being the most important, but it's really just one of many who exist solely to preserve the regime from internal and external threats. They also happen to have all of the guns. So as with other authoritarian governments, not just today, but going back 50, 60 years. This is an environment, this is a political context where the mass of people don't really support the government and would love to see a different government. But it's difficult for them to implement change given the obstacles that they face. And unfortunately, January was illustrative of all of those realities. The attempt to effect change through popular demonstration was put down with overwhelming and lethal force.

Yeah. So on that, you know, it does still speak to this problematic context that Trump finds himself in politically and strategically if he chooses to de-escalate now. You know, I think it makes him look quite weak if he decides to end this war with Hormuz still shut and worse than that, with the Iranians allowing a certain number of ships through. They've been making bilateral deals with Pakistan, with India to allow a couple of ships through at a time, demonstrating, for all intents and purposes, that they control the Strait of Hormuz, not the United States or not anyone else. I think it's very problematic for Trump to decide to wind down combat operations, wind down this war against Iran without having dealt with the strait in some way. The problem is there are no good ways of doing that. They're trying to degrade Iran's capabilities, you know, bombing its drones, bombing its missiles to a point where ships will feel comfortable moving through the strait. But it's taking them a long time to do that because Iran has a lot of missiles and it has a lot of drones. And the geography of the Strait of Hormuz, parts of it are extremely mountainous. Iran has spent decades building positions to do this. I mean, again, it speaks back to their strategy. They've been preparing for this for a long time. This is a war they've been thinking about fighting for a very long time. So it's taking the US a while to weaken Iran to the point that the tankers and the other ships feel comfortable using the strait. On the question of an international coalition, you know, bringing in more states, more countries, bringing in more ships would make this easier. The problem, of course, is that the United States, the Trump administration, doesn't have the best relationship with most of its European allies. There was an attempt initially to put together an international group to bring in the French, bring in the British, bring in others. And the Europeans were initially on board. The problem, though, is that that shifted with Trump using this maybe as a source of leverage of trying to get the Europeans to actively join the war and bomb the Iranians, not just protect ships. Also using this to maybe move the Europeans on issues like NATO's funding, on issues like Russia, Ukraine. And so the Europeans moved from saying, okay, we'll help you to you're on your own, you know, we'll come and help move ships through the strait, but only if there's de-escalation. So it's another aspect of the kind of strategic trap that the United States finds itself in. It's fighting an enemy who can't really be fully deterred or degraded, an enemy that is resisting being coerced or forced into capitulating, an enemy that can't undergo a political change through decapitation. Like they're killing leaders, but those leaders are just being replaced very often by more hardline figures. And this and the problems associated with reopening the strait are just proving to be, I think, far more challenging than they had expected if they had expected to deal with this at all. There's evidence to suggest that the administration didn't really think too much about Hormuz when it launched this war.

Exactly. Exactly. And it also, you know, it speaks to the longer term issues that this war represents, because if you assume that the war is going to end in some kind of limited fashion, the Islamic Republic's not going to collapse. There's not going to be regime change. The war is going to end with Iran still having a couple of drones and missiles left over, very weakened, but still there. The issue for the GCC, for the Gulf states with that scenario is that it's extremely dangerous. They are now facing a regional power that is comfortable attacking them aggressively if it gets attacked, even if they had nothing to do with it. And again, it's part of Iran's strategy. They're trying to impose as much pain as they can on everybody in order to raise the costs of this ever happening again. They're thinking not only about this war, but they're thinking about future wars. They're trying to restore deterrence. And this puts the GCC states in a very, very awkward position. On the one hand, many of them would like to see this war end more conclusively with the threat of Iran not just degraded but neutralized because leaving it in place is so dangerous to them. On the other hand, they likely know that that's impossible, that this isn't going to end with regime change. So what do they do? I think counterintuitively, in the short term, most of them are going to pursue closer relationships with the United States because they have no other choice. They need to improve their security. Most of them right now are relying on US support for their air defenses. They need the US to restock their supply of interceptors. They need the US to help them shoot down Iranian drones, Iranian missiles. Also, historically, all the states of the GCC depend on the United States for protection. You know, they have their own militaries. They are generally not regarded as being extremely capable. So they do need ties to the US to secure themselves. And this war has, if anything, made that relationship with the US all the more important. But that's not enough, because they've now seen that if the US attacks Iran, they will be on the front lines. So they're likely going to have to balance that somehow. They're likely going to have to balance that by perhaps pursuing closer relationships with each other. You know, there was already kind of some momentum for this war on regional security relationships. Saudi and Egypt becoming closer. The UAE and Israel pursuing closer ties. Saudi and Pakistan have a mutual defense treaty now. They will come to each other's protection. They will come to each other's aid if they're attacked. Although Pakistan is not attacking Iran, even though Iran is attacking Saudi Arabia. So the full value of that agreement is maybe somewhat suspect. But that's that, I think, is another potential avenue that they may go down. They may look to one another to improve their security rather than depending on the United States, which is proving to be, in the short term, a crucial ally, but in the long term, a very problematic partner.

It relates to Iran's broader strategy, not only its strategy for surviving this war, but its strategy for improving its deterrence and reducing the possibility of this happening again of future attacks. The bigger scenario that the Iranians are more concerned about is a scenario where Iran turns into Lebanon or Iran turns into Syria, a country that you can just bomb, that Israel can just bomb whenever it wants to. They're very, very concerned about that becoming the new status quo. So that is what's driving their strategy. They want to restore deterrence. And their way of doing that is indicating to everyone the United States, Israel, the GCC, but the entire world that attacking us is not worth it, that we will respond by imposing more pain, more costs on you than you can impose on us. The Iranians love to demonstrate this. They love to talk about this. And I think they are illustrating it, that they are more resilient, that they can take the hit, that it doesn't matter that the US and Israel have air superiority over Iran. It doesn't matter that they're killing leaders or striking targets in the hundreds and the thousands, that at the end of the day, the Iranian government, the Iranian military is more resilient and can outlast any of its competitors. Now, the reason why they're striking the GCC is there are two reasons for this. One, more immediately, the GCC is a more tempting target. These are soft targets, energy infrastructure. It's fairly easy to do damage to a level that causes the facilities to have to be shut down for repairs. The GCC do have air defenses, but the targets the Iranians have been going after are not hardened in the way that, you know, US bases or Israel are hardened. Israel is extremely well-defended with its multilayered air defense systems, with its civil defense systems. Israel is kind of a fortress state in many ways, because it has sort of lived under the threat of outside attack for so long. The GCC isn't like that. And on top of that, it speaks directly, Tracy, to what you're saying. The Iranians are trying to show the GCC states, and particularly the UAE, your model of economic development, this idea that you can turn the Gulf into an island of stability with tourism, with finance, with tech, with hotels, all of that will go away if we keep being attacked. If the US and Israel keep bombing us, we are going to turn the Gulf into a live fire zone and eventually that will make your economic development plans impossible to achieve. So they're imposing all this pain. They're imposing all this costs. The second reason they're doing this is they are indicating to the GCC that their relationship with the United States is untenable, that so long as they allow the US to have bases in the region, so long as they allow the US to support their security, that from the point of view of Iran, they are US allies, they are US instruments, and that makes them legitimate targets.