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Washington’s plan to consolidate control of the Persian Gulf has gone disastrously wrong and they now find themselves stuck in a war they cannot win. Worse than that, the closure of the Strait of Hormuz is starting to have a huge impact on the global economy.
The assumption in Washington was that the Iranian government would collapse within weeks and even if it did not, the US has sufficient military power to pound Iran into defeat and to take control of the Persian Gulf (and within it, the Strait of Hormuz) to ensure the free flow of oil across the globe. The US itself possessed more than enough supplies of oil and diesel to sustain its own economy and to deepen the dependence of its allies in Europe and elsewhere.
The US succeeded in killing Ayatollah Khamenei and other leading figures but the Iranian government did not collapse, and it is clear from the many millions who came out for the funeral of the Ayatollah that the Islamic Republic retains a wide level of popular support. The military failure of the US is even more striking. It was widely assumed that the US possesses a huge supply of advanced weaponry, and that their weapons are superior to those of any other power. It is now clear that the US has only a limited supply of advanced weaponry and that these have been incapable of defeating Iran. The Iranians have been able to use asymmetric tactics, using drones and cheaper ballistic missiles to destroy US military bases across the whole region and to inflict significant damage on the Israeli military. The cost for the US of intercepting Iran’s missiles is far greater than the cost for Iran to produce them. Trump and his henchmen can rage and rant all they like but they cannot re-open the Strait of Hormuz. And therein lies the problem.
The Persian Gulf region is a major supplier of fossil fuels (and fossil fuel products) across the world and these have to pass through the Strait of Hormuz (or the Red Sea). Blocking the passage of these fuels was inevitably going to lead to shortages of key products for the global economy. Washington didn’t worry about this because the US, unlike Europe, has its own supplies of oil and gas. They do not, however, produce ‘crude oil’ which is needed for making diesel fuel and which is essential for aircraft and trucks. The US did have large reserves of diesel fuel, but that is now running low.
Oil and gas are not the only problem. The Persian Gulf region is a major supplier of other important products made from fossil fuels. Urea and helium are probably the two most important. Before the mid-20th century most farmers around the world – especially in the Global South – used organic materials, like manure, for fertilizing crops. But since the so-called ‘Green Revolution’, most farmers use urea – a product of fossil fuel – which has significantly increased crop production. Nearly half of global supplies of urea come from the Middle East region with much of it flowing through the Straits of Hormuz. Shortages of fertilizer are causing huge problems for farmers across the world. This is compounded by the exceptionally warm weather which is being experienced as a result of a powerful El Niño weather cycle. We are now facing a global food crisis which could have huge repercussions around the world.
Helium is used for making semi-conductor chips. The Wall Street Journal has called helium the ‘invisible powerhouse of modern technology’. Qatar is the world’s second largest producer of helium and the war on Iran has led to a significant reduction in the global supply of semi-conductor chips at the very time when they have become ever more central to the technology industry, not least to the ballooning AI (Artificial Intelligence) sector. The US war on Iran is taking place against the background of one of the largest stock market bubbles in history. The valuations of AI on American stock markets today are higher than they were before the Wall Street crash of 1929.
Socialists and ecologists have warned against the rapid rise of AI because it will lead to huge job losses and that the data centres which store AI are extremely damaging to the environment. None of this worries stock market investors. They assumed that the shift to AI would have an enormous impact on the global economy and that it would be hugely profitable to investors. It was also assumed that the shift to AI would greatly strengthen the position of the United States in the global economy. All of these assumptions are now starting to look questionable.
The Americans were horrified to see that Chinese companies were not only producing forms of AI as advanced as those of American companies but were producing better products and doing so at a much lower cost. In some cases, the Chinese were making these products freely available on the global market. New forms of technology can lead to significant changes in the economy but that does not mean that this will happen quickly or that all the companies involved will be profitable.
Many business insiders are sceptical about the proclaimed achievements of AI and they believe that it will be a long time before AI companies make a profit, if they do at all. The Bank of International Settlements, ‘the central bank of central banks’ has warned of the danger of the AI bubble. So too has Martin Wolf, the leading economic commentator at the Financial Times.
This is all coming at a time when the dollar’s role as the world’s ‘hegemonic’ currency is looking increasingly fragile. The US has used the dollar as a weapon against other states (most notably Russia and Venezuela) seizing their dollar assets. This has made many other states uncomfortable with using the dollar as a reserve currency. To make matters worse the US has accumulated exceptionally high levels of debt – public, corporate and household – which they are struggling to repay.
All of this is coming together to undermine the American-led financial order. The US may no longer be the centre of global manufacturing but the dollar remains at the heart of the world’s financial system. A financial crash in the US will have a huge impact on the global economy, and on global politics.