Can We Sit Out A Gulf War?
LARRY M. ELKIN, CPA, CFP®

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Larry Elkin, Certified Financial Planner (CFP®), CPA, is president of Palisades Hudson Financial Group.

The ultimate consequences of Iran’s latest foray into “don’t look at us” aggression are far from clear, but one thing is certain: A lot of players, Iran included, must now put their cards on the table.

News broke yesterday that Saudi oil officials are buying refined products and crude from other countries in order to supply their own customers in the wake of last week’s attack on key installations in their desert kingdom. Iranian-backed Houthi rebels in Yemen claimed responsibility for the attack, but both the United States and the Saudis have said the attack was most likely launched from the other direction, probably from inside Iran itself.

Secretary of State Mike Pompeo arrives in Jeddah, Saudi Arabia on Sept. 18, 2019.
Photo by Ron Przysucha; courtesy of the U.S. Department of State.

By turning quickly to the markets as buyers, rather than in their usual role as the world’s largest seller, the Saudis show they are prioritizing the protection of their share of an increasingly competitive global oil market. That market has been upended by the accomplishment of what was – not too long ago – the seemingly impossible dream of North American energy independence. The U.S. now produces more oil than anybody else and is a net exporter, if not on the scale of the Saudis since our domestic demand is far larger.

The Iranians have tried to maintain their typical I-didn’t-do-it stance, backed by bluster against anyone who forthrightly calls them liars and responds accordingly. The Europeans and the Japanese, who have far more at stake than the Americans in protecting the free flow of Middle Eastern oil, have also acted in character. This has taken the form of mumbling about needing to check their own sources of information to determine responsibility for the attacks. France, which recently proposed a $15 billion credit line in exchange for Tehran’s agreement to rein in its nuclear program, has committed to “a strategy of de-escalation” as it looks into the matter. (Germany, too, has emphasized its commitment to de-escalation.) French Foreign Minister Jean-Yves Le Drian told Reuters, “Up to now France doesn’t have proof permitting it to say that these drones came from such and such a place, and I don’t know if anyone has proof.” As for an eventual response when they ascertain what is increasingly obvious: crickets.

The Chinese, who are also deeply dependent on the global oil market and are among Iran’s chief international supporters, have been circumspect on the subject thus far. One can only imagine the private reactions of President Xi Jinping, who already has his hands full with a drastically slowing domestic economy and a trade tussle with President Donald Trump. I would be shocked if Xi has not made very clear to Tehran that China could find itself with no choice but to accede in every respect to global and U.S. sanctions. Until now, China has sought either to exempt itself from these sanctions, or to soften or evade them.

The Iranians find themselves living the dream – specifically that dream in which you find yourself in public wearing nothing but your underwear. The 10 drones that the Houthis claimed to have flown from their bases hundreds of miles to the south did not circle the targets, reverse direction and make at least 17 impacts from the west or northwest. Nor did they morph into the Iranian-designed cruise missiles and drones whose wreckage has been found in Saudi Arabia. The Iranians are going to have to own what they did.

From an Iranian point of view, the attack on Saudi oil facilities makes perfect sense, even as it nakedly displays their regime’s mounting desperation. U.S. sanctions have nearly succeeded in stopping Iranian oil exports, and whatever the Iranians do manage to sell is likely deeply discounted. Meanwhile, Iran’s neighbors around the Persian Gulf sell all the oil they want, taking Iran’s customers in the process. The Iranians believe they are being choked by an administration that pulled out of the 2015 nuclear accord, which had brought brief relief and a much-welcomed influx of cash and investment. They are correct.

Of course, this is not happening without reason. The Iranians have tried to surround their Saudi regional rivals with hostile proxies, including the Houthis to the south, Iraqi militias to the north and Lebanon-based Hezbollah to the west. Hezbollah is also deeply involved in defending the Syrian regime of Bashar Assad, which is now nearly a wholly owned subsidiary of the Islamic Revolutionary Guard Corps. These proxies provide Iranian military advisers a direct land corridor to the borders of Israel.

While being being quick to blame Iran for last weekend’s attacks, the Trump administration has been content to wait before moving ahead on any sort of retaliation. Some of the president’s more hawkish supporters, including Sen. Lindsey Graham, would like to see a muscular military response. Others see inconsistency or even hypocrisy in the administration’s reported efforts to assemble an international coalition, possibly under the banner of the United Nations, to take some action. Trump has been derisive and dismissive of the U.N. in the past.

But like Iran’s behavior, Trump’s response actually makes considerable sense when seen from his position – which is essentially the catbird seat in this entire drama.

Of all the world’s major industrial powers, the United States presently needs Middle Eastern oil the least. This is thanks to pro-petroleum policies that Trump’s party mainly supports, and which his opponents would prefer to block. Trump likely sees little reason to spend American blood and treasure to protect China’s oil supply. He probably sees not much more reason to do so for the benefit of ostensible European allies who are trying to prod him back into the 2015 deal that did nothing to limit Iran’s regional aggression and missile development. Iran already possesses cruise missiles that can reach Europe.

America has no treaty obligation to defend Saudi Arabia militarily, although we certainly have some geopolitical reasons to do so. This is not changed by the fact that the current Saudi Crown prince and de facto ruler is a reckless authoritarian widely believed to have ordered the murder of journalist Jamal Khashoggi at the Saudi consulate in in Istanbul last year. For Trump, the attack may serve as a useful reminder to Crown Prince Mohammed bin Salman of how much he depends on Western support for his kingdom’s physical and economic security. It may also foster a growing – if largely under the table – accommodation between the Saudis and the Israelis, driven by their common adversary.

Trump adopting the strategy of letting things play themselves out makes some sense, though it has its own pitfalls. A big one is that while we have no obligations to the Saudis, we do have obligations toward our NATO allies. If, for example, the Iranians attacked British warships in the Strait of Hormuz, we would be obliged to answer any British call for military assistance. This scenario is far from inconceivable, considering that Iran seized a British-flagged oil tanker in July. A call for help from a NATO ally would take away American control over the timing and manner of any military moves against the Iranians.

We also don’t want Iran to succeed in further weakening the global economy by driving up prices for petroleum and its shipment. Nor do we want the Iranians to succeed in getting sanctions relief by means of military pressure and their other favorite strategy, hostage taking. Trump has let at least five Americans languish in Iranian custody rather than buy their freedom as his predecessor did with an earlier group of hostages. That purchase was an obvious part of the price President Obama paid for the 2015 nuclear deal, although his administration always denied this.

Trump has thus far made only a vague order to further tighten sanctions on Iran. There are not too many places to tighten, but I see one: air transport.

No U.S.-based airline flies to Iran. British Airways stopped its flights last year for commercial reasons, when reimposed sanctions dried up traffic on its routes. But Lufthansa, Germany’s largest carrier, flies to Imam Khomeini Airport in Tehran. So do other airlines with operations in the United States, including Emirates, Austrian Airlines, China Southern, Qatar Airways and Turkish Airlines.

We could force these carriers to choose by denying landing rights in the United States to any airline that serves Tehran, directly or indirectly (via code share, for example). We should also flatly ban American passport holders from traveling to Iran on nongovernment business, and strongly encourage our treaty and de facto allies to do the same. This would cut off the supply of potential new hostages.

Such measures won’t be enough to directly change the course of Iranian policy, but they will further drive home to the Iranian people the isolation that their government is heaping upon them.

I recognize that this will not come without cost to the many Iranians living abroad who still have family or property there. But in the end, this approach is a lot better than the sort of bloody military conflict – whether with the U.S., Israel or the Saudis and their neighbors – toward which Tehran’s aggression is leading. It would be best if the Iranians changed their government from the inside. Anything we can do that encourages this outcome, while also immunizing ourselves and as much of the world as possible from Iranian physical and economic hostage-taking, is probably the best possible response to a collection of holes in some Saudi petroleum facilities.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business.”

The post Can We Sit Out A Gulf War? appeared first on Palisades Hudson Financial Group.

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Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York, in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002 and to Stamford, Connecticut 15 years later. In 2005 the firm expanded to Fort Lauderdale, Florida, a branch office that became the firm’s official headquarters in 2017. The firm also added offices in Atlanta, Georgia in 2008; Portland, Oregon in 2012; and Austin, Texas in 2016. Larry is now based in Fort Lauderdale.

As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 30 states, from Maine to California, as well as in several foreign countries. In addition, he works closely with the firm’s Entertainment and Sports Team; Larry leads the team that provides business management to singer-songwriter Maddie Wilson and is a producer member of Film Florida. In 1997 Larry established the organization’s investment advisory business, which currently manages more than $1.4 billion.

He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business.”

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The post Long-Term Solution, Short-Term Problem first appeared May 14, 2019 on the Palisades Hudson Financial Group website.

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The views expressed in this post is solely those of the post’s author.

 

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LARRY M. ELKIN, CPA, CFP®

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