The Threats from Russia and Iran: A Test of Our Resolve?
It was quite a night on Election Day as people across the US celebrated the election of Barack Obama as our 44th President. While there was also much celebration around the world as well, there was not much jubilation among some governments in the world, particularly Iran and Russia. Soon after his election, both countries essentially made threats with Iran talking about defending their borders and Russia stating it would place short range missiles near its border with Poland. While this may look like a test of our resolve, it probably is not.
To see this we should consider the oil market. There are different ways of increasing the price of oil: decrease supply, increase demand or increase the probability of a future decrease in supply or increase in demand. OPEC meetings decide whether to affect price by changing supply. However as the largest producer, Saudi Arabia has considerable clout in that and has tried to strictly restrain the degree of any major decreases in supply despite the huge drop in oil prices as their leadership realizes the huge increases in the price of oil while temporarily beneficial to their economy are dangerous for their economy in the long term – past a point big oil consumers like the United States begin to seriously consider and place huge investment in alternatives to oil that could greatly reduce oil consumption. Considering the many priorities of the Obama administration, the lower the price of oil, the lower the price of gas, the lower the public’s anger over gas and the less urgent is the priority of dealing with energy independence so that other priorities are considered and dealt with. So, by the time they begin to reconsider this issue as a focus of policy, much of the political capital and momentum of the past election may have eroded making it that much more difficult to change.
On the other hand for Russia and Iran, their economies not only depend heavily on the previously very high price of oil but so does the stability of their regimes. So, their leaders’ time horizon may be much shorter than Saudi Arabia’s leaders. Putin has failed to diversify the economy sufficiently to absorb such oil price decreases and has staked his political future and his method of governing on oil revenues while at the same time has seen the economy weakened by not only the financial crisis but the financial damage from his fight with Georgia. Similarly, President Ahmadinejad has wasted most of the oil revenue on costly subsidies that he increased with the recent price increases of oil and placed himself (up for reelection next year) and the governing theocracy in a difficult position politically as he is unable to maintain these subsidies with oil prices having fallen so much and as stated by the IMF in August cannot print money as inflation is already over 25%.
In other words, they both need to find a way to push the price of oil up without getting other countries to decrease the overall supply as much as they would like. How do they do that? During June of this year, the price of oil peaked at about $147 a barrel and has since come down to about $60 a barrel. But it was not only the perceived demand for oil from the US, China and other countries or even the attacks in Nigeria on the oil supply lines that was pushing the price up. It was also the escalation of the possibility of war with Iran – recall Iran test firing long range missiles right before the peak. This tension had the effect of increasing people’s probability of a huge disruption in the oil supply.
So, it is possible the reason they are pushing for confrontation with the US is to hope that we take the bait to increase tension. While more in their interest to probably wait and let Obama and the Congressional Democrats govern and hopefully for the Republicans make some mistakes, the Republican opposition is now desperate for an issue to criticize him on. To show how they were right to claim that he would be tested from the beginning would be a major help. As such, the leaders of these countries may hope that the right will pressure and force him to take a more belligerent stance so as to strengthen their own regimes. Obama’s first test in the foreign policy sphere may be less a test of Obama and our country’s resolve and more a test of his and our country’s gullibility.
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