President Trump fired his National Security Advisor H.R. McMaster on Thursday and replaced him with a staunch proponent of war. The appointment significantly raises the odds of a clash with Iran and North Korea, and almost certainly will result in the withdrawal of the U.S. from the Iran deal.
John Bolton was a fierce supporter of the 2003 war in Iraq, and comes to the White House as an unreconstructed proponent of the invasion. In fact, one would be hard pressed to name a proposed war that he has not supported. In the past, he has repeatedly advocated for military conflict in both North Korea and Iran, preemptively, and that remains the case today.
Recently, the U.S. has been negotiating with European officials over how to amend the Iran nuclear deal to appease Donald Trump. Germany, the UK and France have entertained stepping up some measures –related to Iran’s ballistic missiles program, the end date of the limits on the nuclear program and the authority of international nuclear inspectors – with an eye on keeping the U.S. in the agreement.
The WSJ reports that the U.S. wants the deal extended in perpetuity, but Europe says that would amount to a renegotiation of the entire deal. The sticking point leaves plenty of room for the hardline U.S. government to find a pretext to withdraw from the deal. That was the case before John Bolton’s appointment. With John Bolton now chirping in Trump’s ear, few expect the Iran deal to survive in Washington.
Last year, Bolton released a blueprint on how the U.S. could and should get out of the deal, a deal that he called “a threat to U.S. national-security interests.” In the plan, he says “unilateral U.S. sanctions should be imposed,” and he also said “we will discuss military options.” He explicitly says the U.S. should provide assistance to a variety of opposition groups in Iran, stopping just short of a full-throated endorsement of regime change, although that was clearly implied.
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Needless to say, Bolton’s appointment as National Security Advisor likely means the end of U.S. involvement in the Iran nuclear deal. The deadline to extend a waiver on sanctions is May 12.
"Bolton is an unrepentant advocate of regime change against Iran and his demands for the May 12 ultimatum -- in a practical sense -- will be sharper than those of McMaster," Richard Nephew, a principal deputy coordinator for sanctions policy at the State Department during the Obama administration, told S&P Global Platts. Nephew authored a recent report that estimated that Iran could lose 400,000 to 500,000 bpd if U.S. sanctions were re-imposed on Iran.
Trump seemed to telegraph his intentions on Tuesday. "A lot of bad things are happening in Iran," Trump said on March 20 just before meeting with Saudi Crown Prince Mohammed bin Salman. "The [Iran nuclear] deal is coming up in one month and you will see what happens."
Ultimately, at this point, U.S. sanctions on Iran are likely, and in a worst-case scenario the U.S. could begin exploring military options against Iran. To say the least, the risk of war is much higher after Bolton’s appointment.
Meanwhile, a similar scenario is possible for North Korea. Bolton wrote an op-ed in February titled “The Legal Case for Striking North Korea First,” and last year he said on Fox News "I think the only diplomatic option left is to end the regime in North Korea by effectively having the South take it over." President Trump’s much-hyped sit-down with North Korea’s Kim Jong-un may not happen, and the odds of a military strike are now much higher.
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If Trump meets Kim Jong-un, it should “be a fairly brief session where Trump says: ‘Tell me you have begun total denuclearization, because we’re not going to have protracted negotiations. You can tell me right now or we’ll start thinking of something else,’” Bolton said earlier this month. That “something else” was clearly a reference to a preemptive military strike against North Korea.
The U.S.-North Korea summit is supposed to take place in May, the same month that the U.S. could scrap the Iran nuclear deal and re-impose sanctions. May is shaping up to a fateful month for U.S. foreign policy.
The fallout could have wide ramifications for the oil market – a lot of oil supply could be put at risk this year after the dramatic reshuffling of the U.S. government over the past two weeks, which has created “the most radically aggressive foreign policy team around the American president in modern memory,” according to the New York Times.
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Moreover, it could occur at a time when the oil market is getting tighter anyway, raising the odds of much higher prices. "We are only 3-4 weeks away from peak refinery maintenance, after which crude and product demand should accelerate ... Global inventories are already at the bottom end of the five-year range. With the inventory cushion largely gone, oil prices will likely be more sensitive to geopolitical risk factors," Morgan Stanley said in a research note. "There are sufficient reasons to expect oil prices to strengthen further from here, and we stick with our (Brent) $75 per barrel call for Q3," Morgan Stanley said.
That could be a conservative estimate if Bolton succeeds in pushing the Trump administration in a much more hawkish direction, as seems likely.
By Nick Cunningham of Oilprice.com
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Hold your ground, Nick. The warhawks will soon be coming after you.
However, we have also to remember that geopolitics could push oil prices up only when the market is balanced or nearly rebalanced. We must remember that oil prices during 2016 and 2017 refused stubbornly to rise above $45-$50 a barrel despite escalating tension between Saudi Arabia and Iran, the Iraqi war on ISIS, the Syrian/Russian war on ISIS, the referendum for independence in Iraqi Kurdistan and the harsh war of words between the United States and North Korea. The reason is the glut in the oil market neutralizing these geopolitical events.
Now that the oil market is virtually re-balanced, geopolitical events such as a potential trade war between the United States and China, the launching of China’s crude oil futures contract on Monday the 26th of March this year and the appointment of John Bolton as National Security Advisor could boost oil prices.
John Bolton who is known to be an extreme neoconservative, tends to bite more than he can shew. Still, his appointment does not bode well for the Iran nuclear deal or the civil war in Syria or North Korea. He will egg President Trump to start a war with Iran or take a pre-emptive strike against North Korea or get the United States more involved military in the Syrian quagmire. Should this happen, the United States will find itself ill-prepared to handle the situation and will pay a very heavy price for its involvement.
He was one of the fiercest supporters of the invasion of Iraq in 2003 along with the whole neoconservative lobby and Israel because they all wanted to get their hands on Iraq’s huge oil wealth. The United States won the military battles against Iraq but China who never fired a shot in anger in Iraq won the war. China is now the largest investor in Iraq’s oil industry and is now developing the Rumaila oilfield with proven reserves of 17 billion barrels. It is also the largest importer of Iraqi oil.
Iran will not lose a single barrel of oil exports were the United States to walk away on the 12 of May 2018 from the Iran nuclear deal and impose new sanctions on Iran. The reason the pre-nuclear deal sanctions worked was because of two things: one the imposition of sanctions by the European Union (EU) on insurance companies ensuring Iran’s oil cargoes, and the other the United States sanctions on banks dealing with Iran.
The EU is not going to re-impose sanctions on Iran since Iran has not violated any of the clauses of the nuclear deal. Moreover, the UK, France, Germany and the rest of the EU should not succumb to pressure and blackmail from the United States regarding the Iran deal. Even if the EU appeased the US vis-à-vis the nuclear deal, the US, egged, by Israel and John Bolton will still walk away from the deal. So the EU should keep their independence and dignity and continue their adherence to the deal. As for US sanctions on banks dealing with Iran, even before the nuclear deal Iran was using the Chinese yuan and the euro for payment for its oil exports. Now they will use the petro-yuan to neutralize US sanctions on banking.
Oil prices are heading towards $70-$75 a barrel in 2018 even without the geopolitical factor. Any serious geopolitical developments (not mere talk by John Bolton) could add $2-3 dollars to the price of a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London