Why does the Iran war pose more dilemmas for Europe?

0:00Al Jazeera Podcasts Europe under pressure as the conflict in the Middle East continues. Now, competing with Asia, for scarcer, oil and gas supplies, rocketing prices benefit Russia and weak infections over the Ukraine War, with Europe wary of antagonizing Donald Trump. So how's the Iran War impacting all of these? I'm Imran Khan and you're listening to the Inside Story podcast where we dissect, analyze, and help define major global stories. Now, let's bring in our guests. Joining us from Berlin is Stephen Erlangert, the chief diplomatic correspondent for Europe. And then your time in Moscow is Chris Wefer, CEO of macro advisory, a strategic consultancy focused on Russia and Eurasia. And in Rivedale Park in Maryland is Alan Tonelson, who is an economist and founder of the Reality Check blog. A welcome to you all.

1:00Let me start in Maryland with Alan. Alan, this is a victory for Russia if Donald Trump eases sanctions. It's going to plunge Europe into crisis and it was completely avoidable. I mean, do you have any sympathy with that argument? I have no sympathy with that argument or whatever. And the main reason is that, however, discouraging things look right now economically and also geopolitically and especially for Europe, not for the United States, especially for Europe. We have to ask ourselves how much worse would this situation be if Iran had acquired nuclear weapons? How much power would these mullahs, these Islamic fanatics have had over the entire world economy if they acquired nuclear weapons? And I would submit to you, it is glaringly obvious that things would be much worse. I mean, by the way, President Obama's 2015 Iran nuclear deal

2:03had best kicked the problem down the road a bit. And it was very flawed regarding inspections. Well, let's bring that to Stephen. Stephen, this is a typical argument right from the Americans. You had to stop Iran getting a nuclear weapon. But that was what the negotiations were for and they were ongoing. So do you have any sympathy with the position that Alan takes? Well, I don't want to see a nuclear armed Iran. And I don't think anyone really wanted to see a nuclear armed Iran. Now, the mullahs kept saying we would never have a nuclear weapon. But of course, they were enriching uranium to 60%, which is very close to bomb grade. Now, I don't think they were going to have one very quickly. But had they chosen to have one, it could have happened. But I do believe the JCPWA, the Iran deal in 2015, though, Mr. Thompson's right, it was limited.

3:04In fact, it's now expired 10 years later. It did limit Iran's enrichment to 3.67%, which is pretty reasonable. So now we have an Iran with at least 10 or 11 bombs worth of 60% by the enriched uranium buried somewhere we think under Isfahan. And so that's a danger. Now, does this war make the chance of Iran going nuclear more likely or less likely? That's a very serious question. I don't know the answer, but I worry that if the regime survives, which it seems to be doing, it will make the chance of Iranian bomb more likely, rather than less likely. But I'm not a prophet, and we shall see. I mean, that clearly sets out the American position. I want to bring Chris in here. But lifting of the sanctions, if that happens, it's already a propaganda victory for the Russians.

4:04But if the lifting happens, you know, that is a knock on effect on Europe completely, right? I mean, it's a problem for you. Well, it is to the extent that the European Union, as you said, the introduction is already agreed and has adopted a plan to completely cut itself off from all Russian energy oil and gas by the end of this year. It starts on, it's supposed to start on April 25th, with a ban on any new short-term LNG contracts, and then a ban on all contracts by the December 31st this year. So I guess the assumption that Europe made when it adopted this plan is that it would be easily able to get as much energy as it needed from the global market, from the Gulf and elsewhere.

5:06And now that clearly has got an enormous question mark over it. So Europe's energy strategy is in tatters. They are definitely facing a potential crisis if they get the next moves wrong. And remember, the backdrop here is that European gas reserves coming out of this winter are at an historic low. They used a lot of gas for heating as this winter. They would normally need to start rebuilding those reserves for next winter. It's certainly by June at the latest. And now just an enormous question mark over, where are they going to get that gas? And how much will they have to pay for it? So if you like, Europe's problems regarding energy are only just beginning. And Alan, that situation there is very, very stark. But it begs the question, did Donald Trump know what he was doing when he got into the Iran?

6:09Or did he know that this was going to have an impact on oil prices, gas prices this severely? Well, certainly Donald Trump knew what he was doing when in 2018, he asked the Europeans, why are you still so dependent on Russian energy sources? At the same time, you're expecting the United States to protect you from Russia. And I found it fascinating to just find out this morning that four years after the Ukraine invasion, Europe still has not cut itself off from Russian energy supplies. Of four decades, we've heard about Euro-Sklerosis in terms of the continent's poor economic performance. And now it's very, very clear that concerning matters like energy resilience, that term Euro-Sklerosis applies even more strongly. Stephen, do you think Donald Trump knew what he was doing?

7:10That's a very good question I can't read into his head. He was warned by General Cain that chief of the armed forces, that this could be a very difficult and long war that would test America's supply of interceptors. It's one reason why they waited a few weeks to get a second aircraft carrier off the coast of Iran. But I think they expected a short war to be honest. I don't think they expected it to go on this long. Trump said publicly that the jump in energy prices would be a short-term blip, as it had been in the last June bombing, which lasted 12 days. And it would soon go back to normal. I don't think they thought through, I don't know why, the state of Hormuz shutting down essentially, because for the last 50 years, people have been worried about the state of Hormuz.

8:11This is hardly a new topic in security anxieties. So I do think he expected a quicker victory. I think he expected the decapitation of the regime to result in a different government fairly quickly that would talk to him so far that's not proved to be true. The war continues. We don't know for how long, but I think the markets are beginning to have an impression on the White House, which could, after all, declare victory anytime and leave. But to lose the war against Iran, I think, would be a very difficult thing for Americans to understand. Chris, without Russia firing a shot, it seems to be the only winner in this particular conflict. I mean, is that something that you think is true?

9:12Well, Russia is definitely gaining financially from this situation. Remember, Russia, because of the sanctions that the US announced in late October, which then took effect in late November, Russia has seen a significant fall in oil and gas export revenue for the last three months, December, January and February, because not only was it finding it difficult to find customers for oil, I mean, there's certainly reports of oil literally floating around in tankers looking for a buyer, but they've had to sell a lot of that oil at significant discounts. So while Brent, for example, was trading at about $65, the reports that Russia was selling its oil for about $45. Now, as of early last week, we know that almost all of that surplus oil has been snapped up by Asian buyers and at close to market price. So our calculation, our back at the envelope calculation, is that Russian export value rose by at least $3 billion last week,

10:19roughly the same amount that the European Union say has cost energy, high-range cost has cost Europe. So Russia clearly has benefit, but it's not the only one. Remember, a significant beneficiaries will be the major, sorry, the oil producers in, if you like, the US oil states. The Dallas Fed, Federal Reserve Bank, late last year issued a report or a warning saying that a lot of the particularly independent oil producers in states like Texas, Oklahoma, et cetera, which as I understand it are strongly Republican states, that they were close to financial, it's a strange saying that they needed at least $60 West Texas just to survive. So they will gain a lot from this higher oil price, and this is, say, strong backing for the Republicans or for Donald Trump, but also gas-producing states, Australia is a big energy producer, as is Canada is a big oil producer.

11:19So Russia is not the only country that is gaining from this, but it certainly makes it a budget management heck of a lot easier at these oil prices and with demand for Russian oil, and the fact that they don't have to sell it is discount. Alan Russia is the only, not the only winner here. In fact, as Chris was saying, some Republican states are going to get a financial bananza here, but Russia is the only one that's at war with Ukraine, West Texas, isn't, and that's a dangerous precedent, if you give Russia that money, which effectively you have, you're extending the war in Ukraine. Well, there's no question about that. At the same time, we really have to keep in mind that the oil industry, in fact, the entire fossil fuel industry, is a classic boom and a bust industry. And the big successful companies, the big successful Western companies, in particular, that dominate production in the US and the rest of the Western world,

12:22are very good at navigating these ups and downs. And as we, I think just heard, as global oil prices rise, US producers have much more incentive to put more supply on stream. And that's clearly what's going to happen, and we're going to see these oil price fluctuations continue, certainly for the next few months, as the Persian Gulf situation remains very uncertain. But it's also very clear that, at least from the US standpoint, that the situation is very well in hand in large part because the US economy has become much less fossil fuel intensive than it's ever been. Now, I want to bring in Steven here. Steven, the capitalism will do what capitalism does best, right? It will react to a market.

13:22Exactly what's happening with the energy price sector. But Europe is now competing with Asia when it comes to getting gas physically into their borders. So, you know, what are the options here for Europe? And is Europe panicked about this? Are the people you're speaking to in diplomatic circles? Panicked about this? Well, panic, no, because I don't think people think this is going to go on forever. I mean, the problem is Europe having weened itself from a great deal of Russian energy to be sure not all of it is more vulnerable now. It does need to get gas before next winter, but next winter is several months away. The problem will be, I think, price in the end rather than supply. So, I don't think panic yet, no. But there are some European countries, Hungary and Slovakia, which get direct oil from Russia.

14:24There's a pipeline that got damaged going through Ukraine, so they're struggling with that. The big problem Europe has is the security of Ukraine. The way this war in the Middle East is using up patriot missiles and other kinds of interceptors, which have a very small number of them in the world, is taking them away from Ukraine, which needs them to protect itself from Russian missiles and drones. So, I think the big worry Europe has is less energy, though, that's real, than it is protecting Ukraine from a longer struggle that uses up important interceptor missiles that the Europeans are buying from the Americans, but which the Americans are diverting sometimes for their own use in Iran.

15:27It's a very good point you make because South Korea is actually worried about this. We're talking about Asia because the Americans are moving their third missile interceptors out of South Korea and diverting them to the war effort in Iran. I want to come to Chris here. Chris, there is a strategic advantage here for Russia. There's a political advantage here for Russia, but there's also a military advantage here for Russia. Ukraine may Russia use this to push further into Ukrainian territory and, you know, put Europe on a knife edge? Well, I don't think so. The conflict's been going on for four years now. Russia does appear to be making some gains, but it's literally inch by inch. Of course, we talk and we know a situation with regards to possible supply tightness on interceptor missiles,

16:27but the Ukraine military is very effective. It's well dug in. The fact that Russia may be earning an extra $3 billion in exports even per week is not going to change that dynamic on the ground. It's not going to help the Russian military accelerate its gains in East Ukraine, for example. In fact, I would say that the fact that Russia is making this extra money really doesn't make much of a difference. It certainly makes the finance minister sleep better at night until he has less money to borrow to balance the budget. But it doesn't really change anything. Russia was not heading towards any sort of financial crisis even in January or February with the low oil receipts. It was not facing any sort of economic pressures that would force it to compromise at the peace talks. And that situation really hasn't changed just because it's earning a lot more money today. The fact is that it would appear from all reports that fighting in East Ukraine is pretty much bogged down.

17:33And what's happening in the energy markets financially isn't going to change that. It might change that, I guess, to address your point is that if Europe, for example, were to end up in a more difficult energy situation, perhaps even facing an energy crisis particularly with regard to gas when the next few months when it needs to start rebuilding for next winter, then I guess from the Russian perspective, they may hope that Europe would be more inclined perhaps to press president Zelensky for more compromises at the negotiating table, something which, of course, they have not done this strongly support president Zelensky's position. But the Russian view is that if the energy crisis gets worse, then Europe's political position may have to change in the next couple of months. That clearly depends on what happens in the Gulf and how long it lasts. But that's some of the narrative that we're beginning to hear here in Moscow. Alan, once again, given everything our guests have just said and that you've been listening to, this was all completely avoidable.

18:38You knew that the Strait of Hormuz was going to... I'm sorry, I completely disagree. You predicted that the energy infrastructure would get here and therefore prices would go up because I don't think anybody was talking about that just a fortnight ago when this started. I don't think anybody expected that Persian Gulf military operations were going to leave global energy markets unaffected. And nobody was... Nobody in their right mind would have ever seen that. What was clearly thought was that the overriding imperative was to make sure that Iran never acquired nuclear weapons, because that would have been absolutely catastrophic, not only for global energy markets, but for the global economy period and for global security as well. And when you face situations like this, you have competing priorities, you have to choose.

19:38And I think that the United States has chosen correctly. The United States surely has just chosen the United States though, Alan. Quickly. What else do you expect the United States government to do? Certainly we don't ignore the interests of foreign countries, especially American allies, but American leaders are elected to safeguard and to promote the interests of the American people first. But I would also have to add that once again preventing Iran from getting a nuclear weapon in the long run will be a tremendous benefit for the entire world and nobody should overlook that. I mean, I will point out here that the last Supreme Leader did have a fat wall saying Iran wasn't going to go for a nuclear weapon, which is effectively law in Iran. I want to come to Stephen here. Stephen America has basically abandoned Europe, right? That's what's happened.

20:39Not in the least. We have 70,000 American soldiers in Europe along the frontiers with Russia, in Germany, in Poland, in Romania, defending NATO, deterring anything that might happen. The United States is not abandoned in Europe. What the United States wants to do is Europe to take more responsibility for its own defense. It is true that on this war I don't think America really cared what Europe thought. I mean, it didn't consult nor did it warn. But in terms of abandoning Europe, I think that's simply not true. Chris, there's a pivot here that Russia can do quite effectively. If it winds up that it's biggest market, it's most prestigious market in many ways. It's going to be Asia because of just the sheer value of it. It can position itself from winning itself from way from what Europe wants. And that's a political victory for it because it becomes slightly more independent.

21:44Well, I think the position or the narrative in Moscow, what we hear in Moscow a lot, is that that initial talk about Asia pivots has definitely moderators. The Russians don't want to be anymore. It depends on China as they say they were with Europe. The whole narrative in Moscow is much more about diversification, having more trade partners, more investment partners, more political partners. But you are right. Over the medium term, Russia has already gone through the pain of diverting its energy resources away from what was its dominant market, the European Union, to Asia. It's taken that financial hit in 2023, and it's now almost entirely shifted focus towards China.

22:45And you know, just go back to what you were saying earlier, Europe certainly is in the most vulnerable economic position, but you know, militarily certainly is a different issue, but economically it is in the most vulnerable position. The US is certainly in a very comfortable position because it's sent its energy self-sufficient that produces enough oil for its domestic needs and it's a big exporter of energy. We're running out of time, and I want to come to Alan, just for a very quick answer, because we are running out of time. Alan, what's the appetite here for the Americans? Will they stomach a $200 barrel oil price if that happens? What's the appetite here for the war? Well, that's the $64,000 question, and certainly we've seen in the recent past that the appetite that the American people have, mainly for more military casualties is really quite limited, and I want to imagine that folks are going to be very, very unhappy if oil prices stay this high for much longer, much less if they rise further.

23:53I want to thank all of you, Stephen Erlinger, Chris Weether and Alan Tonelson. This episode was produced by David Fleming of The Remind Chellik, Abla Clar and Gemma Harris. Studio Science was by Sam Pill and Mary Winto, and the program was edited by George and Joseph, Catherine Newhand and Joseph Reyes. You can catch every episode on the Inside Story podcast. Don't forget to subscribe and review us. On your favorite podcast, I'd like to share the episode and leave a comment too. We'd love to hear from you. Thank you for listening, tuning in on Thursday for our next edition. Coming up on the take. As governments restrict information from the U.S. to the Gulf, what do we really know about the war's impact on Israel? That's The Take by Al Jazeera. Find it wherever you get your podcasts.