Musings: Iran Gaining Control of Iraq Without Firing A Shot?

In early July we wrote an article entitled “Middle East: Oil Industry’s And World’s Next Black Swan?”  At that time all eyes in the oil industry and among American citizens were focused on the developments with BP’s Gulf of Mexico Macondo well, which was then spewing oil and creating one of the world’s worst environmental disasters.  We suggested that maybe people should be scanning the horizon for the next industry Black Swan.  We went on to offer our best guess on what that Black Swan might be – the Middle East.  We said that many people wouldn’t consider the Middle East to be a Black Swan – an unknowable and thus unanticipated event – but rather just an ignored developing trend.  In that article we said: “A number of recent data points have emerged that suggest the Middle East may become a focal point of political and possibly military action before the end of the year, or maybe even earlier.”

We suggested that maybe people should be scanning the horizon for the next industry Black Swan

In July, the focus of Middle East developments was on when Iran might be able to complete building a nuclear weapon.  That timetable is dependent upon the country’s ability to produce enriched uranium, which is being done in one or maybe more nuclear facilities.  The buzz at that time among military and intelligence sources was that Israel was preparing an air strike to destroy Iran’s nuclear facilities as it had done a number of years earlier.  Supporting that view was Congressional testimony from Secretary of Defense Robert Gates and Central Intelligence Agency head Leon Panetta that Iran would be completing development of a nuclear weapon in one to two years time at the outside.  Also revealed in Defense Secretary Gates’ testimony was that the U.S. had overhauled its NATO missile defense plans based on intelligence that Iran could fire “scores or hundreds” of missiles against Europe in salvoes rather than one or two at a time.  Sec. Gates did not mention Israel in his testimony but clearly that nation is considerably closer to Iran than most of Europe.

The buzz at that time among military and intelligence sources was that Israel was preparing an air strike to destroy Iran's nuclear facilities

There were also a number of Arab media reports that Saudi Arabia had granted permission for the Israeli Air Force to land helicopters in its country.  The reports were that the Saudi government had offered the use of a base in the northwest part of the kingdom that could be used as a staging point for an aerial assault against Iran.  So far nothing has happened based on the scenario suggested by the intelligence, but there have been other developments that are altering the picture.


Two of the most significant developments are a $60 billion U.S. sale of defense equipment to Saudi Arabia that includes upgraded F-15 fighter planes, attack helicopters and missiles and bombs, including bunker-buster bombs.  The last item would seem to suggest that the Saudi air force may be preparing for a possible fight with Iran and the need to attack its military and possibly nuclear facilities.  The other development is the announcement that the United Arab Emirates (UAE) has opened a new port on the Arabian Sea.  The port also has oil storage tanks.  The port lies beyond the Strait of Hormuz and the oil storage facilities will be hooked up to a pipeline stretching from Abu Dhabi that is currently under construction.

Iran is populated predominantly by people from the Shia sect of Islam versus people from the Sunni sect that dominates Saudi Arabia

In our earlier article we outlined a scenario that Saudi Arabia is concerned about the growing threat to its security from a more militant Iran.  As we pointed out, the battle between those two countries - one with a large population and designs on ruling the Middle East and the other extremely wealthy but with a smallish population – is over their respective religious views.  Iran is populated predominantly by people from the Shia sect of Islam versus people from the Sunni sect that dominates Saudi Arabia.  This religious divide was part of the historical tensions between Iraq and Iran and contributed to periodic wars involving those two countries.  Besides Iraq, the Shia sect is represented heavily in Kuwait with smaller contingents in Yemen and Syria.  There are also pockets of Shia in Turkey, Pakistan and Afghanistan, with the latter increasingly important in today’s geopolitical environment.


The Middle East scenario that various intelligence agents have postulated is that the uprisings along the Yemen/Saudi Arabia border is part of an effort that could become the first step in a more significant attack against Saudi Arabia.  To broaden the effort of a Shia-motivated overthrow of the Saudi Arabian royal family, Iran needs to attack Iraq and gain control over that country, which would provide it with an expanded border with the kingdom.  Thoughts were that Iran would use its potential stranglehold over the Strait of Hormuz to limit Saudi Arabian oil exports while using allies from Lebanon and Syria to subdue Iraq before turning on the kingdom. 

Recent developments may have drastically altered that scenario making it much easier for Iran to gain increased political leverage over Saudi Arabia.


Last week, Nouri al-Maliki, prime minister of Iraq, traveled to Iran seeking guidance on what he needed to do to create a coalition government in Iraq, something that has eluded him since the March elections.  He was told by Iran’s supreme leader, Ayatollah Ali Khamenei, to “get rid of America” and its 50,000 remaining troops in his country.  The challenge Mr. al-Maliki faces, however, is trying to serve two masters, something that won’t last for long or be successful if he wants to create a stable Iraqi government.  Mr. al-Maliki lived in exile in Iran during Saddam Hussein’s rule so he owes a certain amount of allegiance to Iran’s theocratic government.  At the same time, Mr. al-Maliki understands that he would never have become the Iraqi leader had the United States not invaded and overthrown the country’s repressive leader.  The decision on who to listen to is further complicated by Iran’s action several weeks ago to convince another political faction, the Sadrists, in Iraq to back Mr. al-Maliki in his bid to remain prime minister.  The United States insists that this faction be kept out of the coalition because it insists on the departure of U.S. troops.

Another interesting twist in the U.S.-Iran relationship was that a high-ranking Iranian diplomat attended the recent NATO meeting on the transition in Afghanistan, a country that Iran shares a long and porous border with.  This was the NATO informational group’s ninth meeting since being formed in April 2009 at the urging of President Barack Obama.  The group includes 44 countries concerned with developments in Afghanistan and Pakistan. 

The diplomat also attended a briefing by U.S. General David Patraeus on NATO's military strategy in Afghanistan

The Iranian diplomat attended the group’s meeting for the first time, even though initially in 2009 Iran had signaled its interest in participating in the group, but never participated.  The diplomat also attended a briefing by U.S. General David Patraeus on NATO’s military strategy in Afghanistan.  The diplomat was quoted by media sources as being pleased with the degree of transparency with NATO’s actions. 

The involvement of Iran in this NATO gathering and strategic updating, coupled with its role in providing guidance to Mr. al-Maliki, raise questions about whether Iran is securing its expansionary goals without having to work very hard.  Mr. al-Maliki is left with an interesting choice – he can side with Iran and form a stable government in Iraq, or he can side with the U.S. and continue the seven-month crisis and face escalating violence and economic harm at home.  Assuming he takes the first option, Iran gains a strategic partner in its efforts to eventually unseat the Sunni theocracy in Saudi Arabia.  That possibility will keep global oil markets on edge and oil prices volatile. 

A better oil supply situation for Iran will strengthen the country to withstand sanctions and boost its military strength

There is another aspect to the oil equation, which relates to the large oil fields in Iraq that are planned to be developed through agreements with western oil companies.  Reduced politically-motivated violence could speed up that development doing two things: 1) providing badly needed oil and refined products to Iran, and 2) bringing huge new global oil production on stream in a few years time putting oil prices under pressure.  Neither of these options appears to be favorable to the U.S.’s most staunch political ally in the Middle East – Saudi Arabia.  A better oil supply situation for Iran will strengthen the country to withstand sanctions and boost its military strength.  Lower oil prices, at a time when Saudi Arabia is struggling with its rapid population growth and rising domestic oil consumption that is restricting growth in the country’s oil exports and thus its income, could undermine the royal family’s control of the country. 

We will be watching closely to see what decision Mr. al-Maliki makes.  The decision is likely to inject a new level of tension into the Middle East and, depending upon the strategy embraced, could lead to more volatile oil prices in the future.  We could argue for both higher and lower future oil prices depending upon the decision.  If we were a betting person, we would side with the Iranian support decision that will likely inject increased fear into the Saudi royal family.  What steps it takes and how long before significant new oil flows emerge from Iraq remains to be seen.  Maybe the $60 billion defense purchase is the step.  A spike in oil prices in 2011 is not out of the question but that could ultimately lead to lower prices in the longer term.  Put that scenario into your capital spending models!

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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