Dear readers,
The war in Gaza has been going on for more than a year now, and Israel has crushed the capabilities of Hamas in Gaza and Hezbollah in Lebanon. But the war is now pulling Iran, a key architect of the conflict, into more direct action. On October 1, Iran launched a massive missile strike against Israel. What are the scenarios for an escalation, and eventual resolution, considering the vulnerability of energy shipping in the Persian Gulf? What are the real intentions of Iran?
The relationship of Iran with its neighbors is very complex. Fault lines run along energy resources, trade corridors, religious believes, and centuries of historical narratives. A single posting won’t do justice to the many dimensions, so my plan is to run a mini-series on the potential development of Iran’s role in energy politics. Stay tuned! I think I’ll present you some insights which you probably won’t get anywhere else – I hope this is interesting for you and helpful in your own discussions.
As the pieces come together, I will also resolve the mystery about this week’s banner picture – and the continuing role of deep-rooted believes in Iranian society.
Anno domini 1900, toward the end of the year, a traveler from the Middle East arrived in Paris. His name was Antoine Kitabgi, supposedly an officer in the rank of a general and a bureaucrat in the Persian government. He’d come to ask for help of a retired British diplomat who was attending the Persian exhibition in Paris. You see, his master, the Shah of Persia, ran something like a profligate lifestyle and was notoriously out of his pockets. Would Britain be interested in supporting him in some way?
The British diplomat listened up. Persia itself wasn’t much more than a huge, empty desert on the map, but it had been an important gateway into the east for centuries and part of trade routes between Asia and Europe. Russia was muscling its way into Central Asia and already extended far into the south until Baku, just north of the Persian border. Russia badly wanted a warm-water port, and all that separated it from the Persian Gulf was a corridor through Persia. No doubt Russia was going to develop a significant naval base there sooner or later, potentially to become a challenger to British naval superiority. It was also driving a wedge into the land connection between Europe and Britain’s most important colony, India. Supporting the Shah to stave off Russia made all the sense in the world, but how? Writing checks for a foreign king to finance his parties wasn’t something Britain was prepared to do.
The general pointed out that a French geologist had found some rocks which contained oil and indicated there were considerable oil reserves in the ground. There were also a few locations where oil seeped from the ground, which was essentially used for caulking ships. General Kitabgi said the Shah was ready to sell a concession for prospecting.
The British diplomat thought of William Knox D’Arcy, an English adventurer who had emigrated to Australia many years before. Over there, D’Arcy made a big bet on an old, desolate mine, revitalized it and literally struck gold. He was now back in England, living the life of a millionaire. When he and his wife ran dinner parties, Enrico Caruso, one of the most famous opera singers of all time, came to sing for their guests.
Would D’Arcy, now in his fifties and leading a comfortable life, be ready to take his chances a second time?
D’Arcy agreed. He sent an envoy to Tehran on March 25, 1901, to negotiate terms for the concession. It took the envoy three weeks to reach Persia. Russian diplomats got wind of his mission and tried to sabotage his negotiations with the Shah. But D’Arcy was able to drop massive amounts of cash money on the table. For twenty thousand pound sterling upfront, and a sixteen-percent share in profits, the Shah signed the deal on May 28, 1901. D’Arcy received an oil concession for sixty years, covering three quarters of the country.
D'Arcy now had a permit, but no company, no equipment, and no experience. He recruited George Reynolds, an engineer who had previously worked in oil drilling on Sumatra. They chose Chiah Surkh, a desolate strip of land in the north-east of Baghdad on today’s border between Iran and Iraq, for their first exploration attempt. If D’Arcy had thought the negotiations with the Shah, and keeping off the Russians, were difficult, he hadn’t seen anything yet. Persia was a huge, hostile stretch of desert without roads or any support infrastructure. His crew lugged exploration gear hundreds of kilometers through the desert, on the back of thousands of mules. D’Arcy had been advised it would cost him about 10,000 pounds to open a well; by 1903 he had spent already 160,000 pound sterling, with another 120,000 pounds lined up to go out of the door, and nothing to show but a faint trickle of oil. He desperately needed a co-investor.
A consultant to D’Arcy, Boverton Redwood, brought another company into the game which also had started as a ramshackle operation just a few years earlier, Burmah Oil. The Glasgow company had been putting together an oil firm in Burma, starting off with the most basic form of oil gathering of Burmese villagers from natural wells. Burmah became a partner to D’Arcy. They scrapped their operations in Chiah Surkh and set up tents in Masjid-i-Suleiman. Drilling began in early 1908, but the Scottish owners of Burmah were becoming increasingly anxious about their huge and ongoing investments, knowing well that D’Arcy had sunk more than 100,000 pounds of his own money over the years before. In April, they told D’Arcy he had reached budget limits.
But on the ground, excitement was building. By April, the smell of oil was in the air. In the sunlight, gas discharges could be seen flickering above one of the wells. Unimpressed by that, on May 15, Burmah sent a cable from Glasgow telling D’Arcy the operation was basically over, and that they would write a formal letter to Reynolds, the engineer who still ran the drilling site, to instruct him to pack up. D'Arcy turned a deaf ear, and the letter took time to reach the remote camp.
The evening of May 25 was so hot many crews went to sleep outside their tents. On May 26, in the early morning, a rumble went through the ground which soon turned into a roar waking up the camp. Petroleum gushed out of the ground in a jet fifty feet high; the gas which came with it almost knocked out the workers around the well. It was two days before the seventh anniversary of the concession agreement; seven years of relentless work crunching rocks in the desert, but D’Arcy and Reynolds had found the first oil well in the Middle East, changing the world of energy and geopolitics forever.
(Drilling well in Masjid-i-Suleiman 1908; first oil gush in the Middle East. Source: Iran Petroleum Museum)
The countries of the Middle East have come a long way since that time, and their development has resulted in a bi-polar power structure in the region: Saudi Arabia, which is economically aligned with the U.S.1, and Iran, into which Persia renamed in 1935. Iran is the only Shia Muslim country there, a sect of Islam whose followers have faced repression and discrimination over the centuries in other countries2. It has long been a core mission of Iran to resurrect Shia Muslim faith.
The power dynamics are now changing under two key influences.
First, when the U.S. government destroyed Saddam Hussein’s regime in Iraq in 2003, it also took out the only force in the region which held Iran’s ambitions at bay. Hussein had built the world’s fourth-largest conventional military force and engaged Iran in decades of open or covert war. With Iraq gone, Iran finally had the opportunity to direct all its attention and resources towards developing its nuclear program, no doubt as part of a weapons program.
Second, China has emerged as a key challenger to U.S. economic hegemony. China has huge appetite for energy imports in particular to clean up its energy sector and replace coal as its primary energy carrier.
Will China co-opt Iran and transform Iran’s role in the world’s power plays?
With its Nuclear development/ uranium enrichment program, and support of terrorist proxy forces, Iran has put itself into a corner internationally. The U.S. has imposed tough sanctions which make it very difficult to trade with other countries. Sanctions not only restrict trade between Iran and the U.S., but also extend to U.S. citizens and the U.S. dollar – meaning, if any third country transacts with Iran and uses dollars for payment, that country is on the hook for violating U.S. restrictions.
What are the strategic options to leverage Iran’s energy reserves now? What is the potential for escalation after the recent missile barrage on Israel (October 1?)
Iran has put some effort into reminding the world why the gulf is called the Persian Gulf: mock attacks on tankers with rockets, but without an effective warhead; harassing tankers with speedboats or even cases of confiscations – all signals that it could do real harm if it wanted. In game theory lingo, it established a ‘credible threat’.
(Busy Saturday at the Hormuz Straits. Orange: tankers; yellow: cargo ships; light blue: fishing vessels; dark blue: tugs, utilities; purple: leisure)
It is an exchange of signals and moves to show capabilities, pain tolerance, pointing the way forward – and of course, to win time. From the perspective of Iran, this is a game of 3D chess. It wants to win that game, one move at a time, but not toss it from the table.
Iran has secretly rebuilt a large part of its exports since 2020. Before the sanctions, exports were in a range of around 2 – 2.2 million barrels a day. By 2020, they had dropped to below 400,000; in early 2024, they were back in an estimated range of 1.4 – 1.5 million. Most recent estimates are even 1.8 million barrels.
(Daily export volumes of Iran, in millions of barrels. Source: U.S. EIA, Vortexa tanker tracking)
How did Iran pull that off?
The loading docks of Iraq, today the region’s second largest exporter, near Basra are just a hair’s breadth away from Iran’s terminal near Abadan (the location originally developed by D’Arcy and Reynolds, who built the region’s first refinery there). Kuwait, another large exporter, is in the immediate proximity as well. If ships manipulate their position transponders, they can offset their travel routes by the few kilometers just enough to reach Iranian terminals. That kind of deception isn’t very complex to execute. Russian LNG vessels use the same tactic to camouflage the origin of their cargo in Russia’s strategy to resupply Europe with Russian gas (for more info please check The Great Russian Gas Hoax).
Today’s practices in global shipping enable additional layers of evasiveness. Tankers are generally registered in Panama, a tolerant host for registrations which makes it easy to change the names of ships. This makes it even more difficult to track vessels.
The cargo then is often transferred to other ships on the open sea or in other ports. It is estimated that about 90% of Iran’s exports go to China, compared to about 25% in 2017, before the sanctions were imposed . Needless to say, this scheme also requires several layers of fronting companies to conceal the payment flows.
Those schemes are costly, and Iran sells to China at a discount of probably $10-30 a barrel. But it has rebuilt a revenue stream of more than $30 billion annually from crude alone.
However that trickery isn’t really a game-changer. The real prize is in its gas reserves. Iran owns the world’s second-largest proven gas reserves, and countries from China, Pakistan, Turkey, and others have long signed up for deliveries from Iran. How will they execute contracts? How can Iranian gas cross one of the highest mountain ranges on earth, and deal with U.S. sanctions? Stay tuned for the next posting in this series! If you haven’t subscribed, sign up to make sure you don’t miss it.
It’s a complex issue – if you think I missed something, let me know.
Happy to hear your thoughts,
All the best,
John
As I pointed out in Another BRIC in the Wall, Saudi Arabia was a key enabler of the dollar reserve hegemony through a secret program to purchase U.S. Treasury bonds.
Already George Reynolds, William D’Arcy’s engineer, couldn’t help but notice the ongoing bickering between his Persian workers (Shias) and Sunni Muslims.
you are really missing the mark on this one. Israel has not crushed or succeeded at anything, they are in deep trouble. Lost escalation dominance vis-a-vis Iran. Have not crushed Hamas which has reconstituted its forces completely. It's Iron Dome has now been proven to not even be able to defend its most precious military assets against Iranian missile attacks. The incursion in lebanon is doing nothing.
Civilian bombing campaigns and killing leaders have never been effective in the history of war.
Furthermore, the liberal wests opinion is turning against Israel which means any sanction effort would entirely annihilate the country (although I suspect Israel will just threaten with nuclear weapons in that case).
Iran is not a key architect. Israel is. Get your history together, the neocons together with Israel have written about these exact middle eastern wars we have been having 30 years in advance in their seminal work post berlin collaapse which you can all find on wikileaks. I.e., the iraq war, afghanistan and now Iran wars were in the planning. The USA and Israel wanted these wars, and they just needed a match to light the fire.
This Iran war is because Israel wants a war with Iran/USA to 'remake the middle east' in its own image. Anyway, the the neocon-israel foreign policy for the middle east has but only failed. And this will fail too.
Goodness are you entirely wrong on this one.
Iran is not the one that would get sanctioned. Oil would shoot up to 200 euros a barrel if Iran wants to. All the cards are in the hands of China-Russia-Iran, and they know it. They control production (china), they control the resources (Iran/Russia, and China in the resource rich countries) to a far greater extent than we do. Without China tens of millions of people would die tomorrow in the west, because we wouldn't have any medicines, China having monopolized key components of the medicine fabrication supply chain. And it's not just medicines, it's everything. They have monopolized the refining of all basically all minerals in the world, and these industries are incredibly low-margin, incredibly capital intensive, and we would never be able to compete with china on global markets.
They are just keeping us alive, hoping our system works enough to start recognizing these changes in world order. They have entire armies already sitting inside our countries, they are on top of all our critical infrastructure (because China makes basically all of that), China builds all the ships in the world, and the USA builds.. basically none; and also can not build any ever anymore. That takes decades. So who will have the biggest navy in 5 years? In 10, in 15? China is able to listen into anything the Pentagon does because Huawei makes all of its equipment (and there are no replacements to Huawei; according to the Pentagon) and more.
Turns out if you liberalize everything you have nothing.
It's the end of our empire (personified by Trump that wants to end the empire structures such as NATO). The sooner we wake up the better.
China is just sitting quietly and patiently allowing us to screw up again and again and again and again. Why would they stop this.