From the Iran conflict, four geopolitical shifts India cannot afford to miss

The fog of conflict in the Middle East has lifted somewhat, and one can now discern the geoeconomic and geopolitical changes it has wrought. Whether these changes dissolve over time and conditions revert to the status quo ante February 28, the day American bombers took out the leadership of Iran, or calcify into an invariant structural shift remains to be seen. Irrespective, petroleum-import-dependent countries like India should factor these changes into their discussions on energy and national security.

In this article, I identify four such changes.

First, diminishing confidence in America as a guarantor of security. Other than the most hardened MAGA acolyte, everyone agrees that America was worsted by Iran in this conflict. It failed to achieve any of its stated objectives (regime change, elimination/dilution of Iran’s cache of weapons-grade uranium and degradation of Iran as a regional power) despite, according to its Central Command, American bombers flying 10,000 sorties, hitting 1,30,000 targets inside Iran, destroying 85 per cent of Iran’s missile manufacturing capabilities and 70 per cent of its missile launch infrastructure and sinking most of its navy between February 28 and April 8, the date of the first ceasefire.

Moreover, America failed to protect its Gulf allies from Iranian missiles and drones. Saudi Arabia, the UAE, Qatar, Bahrain and Kuwait all suffered physical and economic damage during the conflict. These countries had permitted America to establish military bases in their territory in exchange for the assurance of such protection. US Secretary of State Marco Rubio recently toured the region to smooth ruffled feathers, but more than anything he may have said, I suspect it was the words of his predecessor, Henry Kissinger, that resonated with the Middle East leaders: “It may be dangerous to be America’s enemy, but to be America’s friend is fatal”. This dent in confidence opens up space for non-Western countries to deepen their security relationships in the region and, in particular, creates an opportunity for India’s defence-related manufacturing and technology companies to explore mutually beneficial opportunities.

Second, the emergence of “choke points” as a lever of power. The Strait of Hormuz, through which 20 per cent of global oil supplies flow, has long been recognised as a potential source of market disruption, but essentially only in analysis. Conventional wisdom has held that Iran does not have the capability to enforce a shipping blockade. Indeed, the one time it sought to do so in 1988, the US 5th Fleet blew up two Iranian frigates, demolished oil platforms and cleared the sub-sea mines within days. Oil tankers were barely impeded. This wisdom has now been upended. Through a combination of missile threats, attacks by small but fast speed boats and adroit social messaging, Iran did halt shipping traffic. The economic and political impact was a sharp rise in oil prices — it peaked at $126 per barrel in April, up from $75 per barrel before the commencement of bombing — imposition of demand-reduction measures across Asia, the drawdown of strategic reserves and a political backlash. One reason President Donald Trump sought peace was concern that the rise in gasoline prices at the US retail forecourt would hurt his party’s electoral prospects in the November mid-term elections and render him a lame duck president for the balance of his tenure.

Iran’s success in leveraging its geographic position for military advantage has focussed attention on “choke points” as a source of asymmetric technological, competitive and strategic power. The former UK PM, Rishi Sunak, has in an article advised countries/ corporates not to seek control over the entirety of an integrated technology value chain but to create a niche position that can give them an “unassailable edge”. He cites Arm Holdings, whose chips are in 99 per cent of all smartphones, TSMC, the Taiwanese company that makes 70 per cent of all advanced semiconductor chips, and ASML, the Dutch manufacturer of extreme ultraviolet lithography machines, as successful examples of this approach. He could have added China’s dominance of rare earths to this list.

Clearly, not every country/corporate can create such a choke point. Those who cannot must find ways of reducing their vulnerability. The Gulf countries are expanding/building overland pipelines as an alternative export route to the choke point of Hormuz. India can reduce its exposure by expanding the storage capacity for strategic petroleum reserves from the current roughly eight days to at least 30 days, or better still, 60 days.

Third, OAPEC is now a spent cartel. The UAE has left it; several other countries are reportedly on the verge of leaving, and Iran is at military loggerheads with the Arab members. Had anyone asked experts to forecast the price of oil in the event of closure of the Strait of Hormuz, they would have indicated a range between $150 and $200 per barrel. In fact, other than the one-day peak of $126/bbl, prices ranged in the $90s. The reason for this relatively moderate trajectory was the reduction of imports by China from 11.4 mbd in February to 6.4 mbd in May, the drawdown of strategic reserves by the IEA and increased production from non-OPEC producers. Together, these factors illustrated the cartel’s weakening influence.

Finally, the reemergence of Iran as a “responsible” state actor. I am no expert on Iranian politics, but from what I have read, the balance of power in the country is shifting towards leaders who, whilst Islamic, are not radical, nor ideologically driven to defend the principles of the 1979 revolution (notwithstanding the week-long funeral planned for Ayatollah Khamenei). They are technocratic, pragmatic and nationalist. They recognise public discontent cannot be indefinitely contained, and policy focus must now be on economic growth.

India has civilisational connections with Iran. Before the US sanctions, New Delhi received oil supplies from Tehran on superior credit terms. It should support Iran’s developmental efforts with technical, manpower and financial assistance. This will not only strengthen ties but also enhance the probability of preferential access to energy.

The writer is chairman and distinguished fellow, Centre for Social and Economic Progress