Thursday, September 17, 2009

Progress With Iran?

Obama has continued the Bush carrot and stick policy in regard to Iran.  Thus, yet another deadline for stopping the production of nuclear bombs is fast approaching.  This time could be different.

As Tom Friedman so aptly tells us, the collapse in the price of oil has made and will continue to make life difficult for Iranian leaders. Their ability to dictate to the people is compromised when their ability to dole petro-dollars declines.

Huge oil discoveries off the coast of Brazil,  in the Gulf of Mexico and along the western coast of Africa portend further oil price declines.  Dramatic increases in auto mileage regulations portend significantly lower demand. Success in tapping huge, yes indeed monstrous, US natural gas reserves gives the US the option of converting at least a portion of our "transportation grid" from gasoline to natural gas. The downward pressure exerted on the price of gasoline will be commensurate with the speed at which natural gas is substituted for oil (industrial use is the most flexible).  The bidding scramble by the US, Russia, Japan, France and South Korea to build a 30 billion dollar nuclear power facility for Iran's neighbor has made Iran green, red and blue with envy.  As the massive nuclear power program in China and its massive electric vehicle program (mostly scooters) grows, the substitution of nuclear power for oil will be substantial.    

On October 1, 2009, negotiators from the US, UK, France, Germany, China and Russia will meet with Iranian negotiators in Turkey. A month ago, it was clear that Russia and China were not ready to vote for new extremely tough sanctions on Iran. Maybe the situation has changed.

Last week, Obama threw a bone to his labor union friends. He slapped a 35% tariff on tires from China. This tariff increases the bargaining power of unions, sweetens the prospects for more campaign donations to Obama and punishes the poor in America who buy low-end tires. The price of these tires will go up.  But, for how long?

Obama did not apply tariffs to tires from Brazil, Indonesia and Mexico.  Goodyear and Cooper certainly did not ask for these sanctions. Indeed, these companies will undoubtedly shift production from China to factories in other countries. There will be a short term cost to Goodyear and Cooper, the value of their investment in China has been reduced, but they will recover and tires from the other low cost producing countries will eventually be sold at only a small increase in price.

Today, Obama announced that he will not deploy an anti-ballistic missile shield in Eastern Europe.  Obama has thrown a huge bone to Russia! Do you suppose Obama got anything in trade?  Bush did not decide to build the anti-ballistic system in Eastern Europe until after negotiations with Iran fell through. In other words, the threat of building the system in Eastern Europe has, from the start, been a bargaining chip. Clearly the US has not been happy with the foot dragging Russia has done in regard to solving the "Iranian problem".  

Obviously, I am not party to the on-going talks. My guess as to reason for the tariff on tires and the change in policy in regard to ballistic missiles is only speculation. However, when one looks at international events as if they were part of a jig-saw puzzle, the timing of these moves just prior to the Iranian sanction deadline suggests that the two bones to China and to Russia are connected with the negotiations.

Afghanistan sits at the international cross road between the west and the east. During the last three thousand years it has been invaded by everyone from Persians to Alexander the Great to Mongols to Russians.  For decades it served as the dividing line between great empires, for example it was a buffer state between the Russian Empire and the Great Britain Empire. It's position as a land locked mountainous territory makes it economically poor, but a great hideout for terrorist.  Politicians suggest that Afghanistan is the key to the long terrorism war, but, in truth, if the terrorist were not "paid to play" they would not endure the rigors of Afghanistan.  

Iran, Saudi Arabia and other rich oil countries have funded the war. Take away the funding and the war would shrink and eventually wither on the vine. As always, it is interesting that the thing we fear the most is the thing that will provide the solution.  Nuclear power is feared, it is also cheap per kilo-watt and coveted.

It makes absolutely no economic sense for Middle Eastern Countries to use oil to produce electricity.  Nuclear power plants can produce electricity for about half the current cost of oil. Each time Iran burns a barrel of oil to air condition a home, it losses $35.

The threat of a nuclear armed Iran is real. No one should ever suggest that nuclear proliferation should be encouraged. However, politicians and news services win brownie points by over-stating the risks.  A fair estimate of how many nuclear war heads it would take to kill every man, woman and child on the planet is over 1 million!  The number of war heads on the planet today is over 10,000.  Obviously, if 10,000 nuclear bombs were to go off in the 10,000 most populated areas, there would be mass destruction and 100's of millions if not billions of lives lost. The point is that if Iran gets one or two or 10 nuclear bombs, the world will not be at it's end. Armageddon can happen at any time, buy the power of God, but we need not believe it is imminent because Iran is close to producing nuclear bombs.

Put on the shoes of an Iranian negotiator for a moment. Think about the biggest bargaining chip you have. If you actually develop a bomb, you have in a sense given up your seat at the bargaining table. From the Obama point of view, the US would have to impose strict sanctions and to be unyielding against a nuclear armed Iran. As long as the carrot and stick game is played, the possibility of quick resolution is at hand.

The pervasiveness of gloom and doom is amazing. People are afraid of one thing or another. Even in the face of a great economic recovery! Worldwide, the average stock price has gone up about 60% from lows set about 6 months ago. Real estate prices are recovering in some of the markets that were hit the worst; home prices in California are about to break above two year lows!  In the USA, about half the people fear that our government is about to go over the socialism edge and the other half are exercised about the poor going without health care. The reality is that even the poorest of Americans have access to better healthcare than billions of others and that Obama does not have the votes to move our country more than a notch or two toward socialism.  The good news is that the people are fed up with wasteful pork barrel spending; fed up enough to throw big spending congressional representatives out of office. Formerly "safe democratic districts" are facing uphill battles. Indeed, even governorships in New Jersey and Virgina are leaning toward republicans.

A deal with Iran would be a huge feather in the Obama cap. It would also give rationality to our current holding pattern in Afghanistan.  We have 68,000 US troops in Afghanistan.  In the absence of a deal with Iran, I suspect we need to double our troop presence to produce a "win" over at least a couple of years. As far as military strategy goes, we need to decide to win or decide to go home. As far as diplomatic strategy goes, we need to show our resolve to continue the war for as long as it takes. To "win" at the negotiating table, it is important that the cost of not reaching agreement is high. The opposition is extremely tired of having it's leaders blown to smithereens by hellfire missile strikes from the heavens. If negotiations with Iran were to dry up economic support, terrorist leaders would go back to farming.

It took about 19 years for the oil price to go from the 1980 peak to the 1999 bottom.  The next 18 years will be an increasingly tough time for Iran, if they don't make a deal!


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