Soleimani’s Death Increases Probability Of Another Oil Shock

The assassination of Iranian Quds Force commander Qasem Soleimani was a brilliant move by the Trump administration, if its goal is regime change.

A number of top Iranian officials have suggested the martyrdom of Soleimani will increase the stability of the Islamic regime, when in fact it is much more likely to make it even more brittle, especially as time passes.

An increasingly brittle and desperate Iranian regime increases the likelihood of a substantial and ongoing disruption to oil supply from the Persian Gulf region causing a major oil price spike, as a means to increase the economic pain on the U.S. — and world — in attempt to end the Trump administration’s “maximum pressure” economic campaign against the country (see Crude Oil Price Surprise In 2020?).

The ballistic missile attack on U.S. troops at two bases in Iraq from Iranian territory on January 8 (local time), in retaliation for Soleimani’s death, was telegraphed by the leadership of the Islamic Republic. This suggests the possibility of ratcheting attacks that could lead to a direct military confrontation between the U.S. and Iran, endangering the flow of oil exports from the Persian Gulf region as well.

But the Trump administration knows it has the Iranian regime on the ropes economically and politically with its oil embargo, even more so now with the death of Soleimani.

As a result, the U.S. is likely to be very careful with its retaliatory responses to Iranian military provocations moving forward, to buy more time for its economic campaign to work and to avoid giving the Islamic Republic a war to divert attention of its generally highly nationalistic people from their worsening economic plight.

President Donald Trump simply announcing additional economic sanctions against Iran in response to its ballistic missile attack on U.S troops in Iraq supports this line of argument.

Soleimani superstar

The massive crowds at Soleimani’s funeral procession, and degree of grieving by pro-regime and anti-regime Iranians alike, says it all. He was the most popular and respected person in Iran: a hero and icon.

And according to U.S. Senator Lindsey Graham, Soleimani was also “the second most powerful man in Iran short of the Ayatollah” Ali Khamenei, the supreme leader of the Islamic Republic, who openly wept at his commander’s funeral in Tehran on January 6.

The charismatic Soleimani came from humble provincial beginnings. He was a career soldier, having fought in the horrific 1980-88 Iran-Iraq War. He became head of the elite Quds Force, the foreign expeditionary arm of the Revolutionary Guard — the protectors of the Islamic revolution — in 1998.

Leapfrogging the Revolutionary Guard’s chain of command, Soleimani was regarded as Ayatollah Khameini’s most trusted advisor, and identified as the mastermind of Iran’s impressive military and political gains in Lebanon, Syria, Iraq and Yemen.

Brittle regime

In contrast, the Iranian regime is extremely unpopular among the general population, with added economic hardship due to the Trump administration’s maximum pressure campaign only making matters worse for the Mullahs.

In November, Iran suffered the the largest, most widespread and violent anti-government demonstrations since the late 1970s, when the despotic Shah was deposed, in response to a proposed fuel price hike. It has been reported that Iranian security forces killed up to 1,500 protestors in more than 100 cities across the country to subdue the demonstrations. In addition, thousands more were injured and arrested.

In an interview shortly before the latest round of anti-government demonstrations, renowned German soccer coach Winfried "Winnie" Schäfer, who recently managed the major Iranian club Esteqlal for almost two years, possibly summed up the unpopularity of the Iranian regime best.

"In two years, I never met a person who was in favour of the regime — and I speak of people from very different backgrounds. Industrialists. Academics. Football players. Taxi drivers and even ministers," Schäfer said. "The people I've met, no matter young or old, are not at all in line with the [Islamic] regime."

However, a number of top Iranian officials, including Hossein Salami, the top general of the Revolutionary Guard, have suggested the martyrdom of Soleimani will serve to bolster the stability of the Islamic Republic. This may be the case in the short term, given his incredible status and Iranians being a highly nationalistic people on the whole.

But in the longer term Soleimani’s death will make the Iranian regime even more brittle for three reasons. The highly popular head of the Quds Force provided the otherwise highly unpopular regime with a degree of legitimacy. This will pass with time.

In addition, Soleimani was a force of history. His successor, Esmail Ghaani, lacks the charisma, stature and likely the talent of Soleimani, and as a result, Iran is less likely to continue to make significant military and political gains in the Middle East. These gains have helped boost Iranian nationalism over the past two decades, indirectly supporting the Islamic regime.

Finally, it has been argued that Ayatollah Khamenei would impose military rule as a last resort to thwart mass demonstrations to save the Islamic regime from collapse through even greater repression. In the previously mentioned interview, Schäfer also said “fear is omnipresent” in Iran. This option is far less likely to be successful without someone of the stature of Soleimani leading the military government.

Supply disruption?

Large-scale social unrest in Iran remains the most likely cause of the next major oil supply disruption in the Persian Gulf region, despite war rhetoric flying from the Iranian leadership in response to the Soleimani assassination and the ballistic missile attack on the U.S. troops in Iraq.

The Iranian leadership has repeatedly warned that if it cannot export its crude and condensate due to U.S. imposed economic sanctions, it would take actions to keep its Sunni enemies in the Persian Gulf region — especially Saudi Arabia, Kuwait and United Arab Emirates — from exporting their oil as well.

As of now, Iranian oil exports have fallen to roughly 250,000 bbls/d, less than a tenth the volume prior to the U.S. reimposing economic sanctions, contributing to the free fall of the country’s economy and increased social unrest.

In an attempt to reverse Trump administration policies against their country — especially given highly polarized politics in the U.S. and the division of powers within the federal government — we should expect Iranian actions to disrupt the flow of oil from the Persian Gulf region to cause another oil price shock, especially if the Iranian leadership come to believe the survival of their regime is at stake.

Iranian actions could include more substantial armed drone and cruise missile attacks on oil infrastructure in the region than the one against Saudi Arabia’s Abqaiq oil processing plant and Khurais oil field in mid-September (see Drone Revolution Threatens Eastern Canadian Oil Imports), if not an attempt to close the Strait of Hormuz to maritime traffic (see Three Scenarios For A Strait Of Hormuz Closure).