Energy and Our World

This article originally ran on Forbes.com on April 10, 2024. All rights reserved.

Daniel B. Markind is a Forbes.com energy column contributor. The views expressed in this article are not to be associated with the views of Flaster Greenberg PC.

Since Israel killed Iran Revolutionary Guard Commander General Mohammed Reza Zahedi and six others in Damascus, Syria on April 2, Iran has sworn that it will retaliate harshly against Israel. Israeli soldiers have had their leaves cancelled, embassies have closed and the public has been on edge, but to this point no retaliatory strike has come.

While it remains likely that Iran will attempt to strike Israel directly, and hard, Iran is in a terrible position. Indeed if the Iranian response triggers full scale war with Israel, it is doubtful that the Islamic Republic can survive.

Since the Israeli strike, armed rebellion has broken out in Baluchistan Province in Iran's east, near Pakistan. The local inhabitants there are ethnic Baluchis, not Persians. Iran is a polyglot country, with dozens of ethnicities coexisting uneasily.

Then this week the Iranian currency, the rial, crashed, losing 30% of its value to close at more than 600,000 rial/US dollar. Already weak, the rial crash means the Iranian people are even more impoverished than before, a difficult thing for the Mullahs who rule Iran to explain as their country is rich in oil reserves (Source). Already reeling from major trading partners reducing their imports to Iran (Source), Iran faces potential economic peril as it may not be able to finance even this reduced level of imports.

The Iranian people however have seen little of the benefits of their oil hegemony. Since the Iranian revolution in 1979, the radical clerics have made hatred of Israel a central tenet of their justification for existence. This is strange as there is no real history of hatred between Persians and Jews. Indeed the two have gotten along well over 2,500 years of history.

To put its hatred of Israel into action, Iran has redirected billions of dollars that could have gone to its own people and instead funded groups like Hamas in the Palestinian territories, Hezbollah in Lebanon and the Houthis in Yemen. In recent years, as Russia has begun to run low on weapons as a result of the Ukraine war, Iran has stepped in as a supplier of drones and other military equipment to Vladimir Putin.

All of this has not gone over well at home. Iran's rulers know they are widely disliked, and some of their policies, such as forcing women to wear headscarfs in public, actually have generated mass uprisings that shook the regime and necessitated large scale and violent crackdowns.

Israel is far powerful than  the Iranian women however. A full-scale fight with Israel means Iran must convert to a war economy on an already weak base when the Iranian public is not on board. Despite being much smaller in population, Israel's economy is larger than Iran's. Israeli society is praying for no war with Iran, but should not come Israeli society will be united against a true existential threat. Iranian society will be completely divided.

In recent days oil has risen to approximately $90/barrel (Source). As recently as January 2024 oil traded at around $70/barrel. Much of this rise is because of the uncertainties in the Middle East. However, prices have not approached some previous highs like $140/ barrel during the financial crisis, or $120/barrel following the Russian invasion of Ukraine in 2022 (Source). One reason certainly is the shale revolution that began around 2007. Thus the oil bounty that Iran usually receives for its oil whenever there is world conflict will not nearly be the windfall it might have received in the past. Further, despite the loosening of sanctions, Iran will not have an easy time exporting its oil. Part of the reason will be, having armed the Houthis and encouraged them to disrupt shipping in the Persian Gulf, the Iranians may not be able to keep their own oil exporting ships safe from Israeli attack should that come. Another will be the general aversion many Western countries have toward trading with Iran after 45 years of Iran trying to export terror and instability throughout the globe.

Having spent billions arming Hamas, Iran now sees that investment reduced to almost nothing. While Hamas still survives, its military effectiveness has been substantially degraded. It's hard to imagine once the Gaza war ends and Hamas takes the necessary victory lap whether the local Gazan population will so quietly accept Hamas taking so much of Gazas supplies for itself and trying to continue an armed struggle that has led to such disaster.

Hezbollah, existing tenuously within the Lebanese state and with the Lebanese Christians and Muslims, has been bludgeoned by Israel in cross border exchanges that Hezbollah initiated in to try to show support for Hamas yet not tip a full scale war. Should such a war come, Israel will be badly hurt but Hezbollah likely will be devastated, allowing the Christians and Sunnis to take revenge on the terrorist group that has destroyed so much of Lebanon.

Without its oil weapon, with its economy so weak and with its proxies having shown to be vulnerable to the Israeli military, Iran has a huge problem. Its most logical way out is to reach some sort of accommodation with Israel, with whom its people have no real quarrel. However, 45 years of manufactured enmity cannot be reversed overnight. Any deal with Israel may put Iran’s ambitions of regional hegemony out of reach. Any war with Israel, however, may put the regime’s future out of reach.