The United States is in an unusual position three weeks after a conflict that was expected to last only three days. Military planners are rarely willing to admit this publicly.
US technically wins on all battlefield metrics that matter, but it is not able to stop the bloodshed.
Iran lost over 50 ships, saw two thirds of their missile launchers destroyed and laid to rest a supreme commander. The missiles are still being fired every day.
War of the spreadsheets
It is important to know the type of war we are in before looking at stockpiles or oil prices.
Patriot PAC-3 missiles are being consumed by the United States at a pace that production lines cannot match.
In the six-day period leading up to the war, reports show that the Gulf coalition probably fired over 1,000 PAC-3s in order to protect against Iranian drone strikes.
Lockheed Martin will produce approximately 650 missiles per annum and won’t reach the 2,000-per-annum mark until 2030. Each PAC-3 missile costs around $4 million.
Iran spends between $20,000 to $50,000 per drone that it shoots down.
This isn’t a mistake. On a per intercept basis, the exchange rate is approximately 80:1 in Iran’s favor.
Iran doesn’t need to destroy US military forces, it just needs to empty its bank account faster than Congress is able to refill it.
According to The Washington Post, the Pentagon estimated that the spending on just munitions in the first 2 days of war reached $5.6 billion.
Rheinmetall, a defence giant, put the total US munitions spending in the first 72-hours at $4 billion. Congress is circling around a discussion of $50 billion in supplemental funding, but no formal request, much less approval, has yet been made.
According to recent discussions, the figure is more than 11 billion dollars just for the initial week of conflict.
Iran has launched approximately 700 ballistic missiles from its stockpile pre-war of 2,100, along with more than 2,100 Shaheds. The ballistic missiles have run out.
Built from fibreglass with basic navigation systems and no complicated components, the Shaheds can be produced in an existing speedboat repair facility.
More airstrikes will not solve the supply issue.
What does Iran really want?
Western analysts continue to ask whether Iran will survive this war. What Tehran really wants to do is change the rules permanently.
Vali Nasr is one of today’s most respected Iran experts and former State Department adviser. He said the new Iranian leadership believes that Israel and the United States are not long distance runners, but can run faster.
Iran has stated that it wants more than just a ceasefire. Iran wants the lifting of sanctions, US military bases in the region to be removed, and Israel to leave Lebanon.
This is not meant to be a break before the next war.
The argument that Gulf States use every day when Iranian drones continue to strike energy infrastructure in the Gulf is that US bases aren’t there for protection, but are just a painted target on their land.
This framing has already started to work at the margins. Gulf States have not responded to Iranian attacks militarily.
Oman mediates, according to reports. The UAE has reportedly been exploring non-kinetic methods of restoring deterrence.
The responses aren’t those of nations that believe their American guarantee will hold up to pressure.
Is Israel and the US fighting the same conflict?
Most media coverage of this issue has been underwhelming.
Washington and Tel Aviv each have a different idea of what victory is, but they are moving in the opposite direction.
The US is looking for a weaker Iran from which it can withdraw.
Israel is looking for a regime to disappear. Trump could impose on Israel a ceasefire that is far from regime change, as oil prices rise and the possibility of regional chaos increases.
The energy market will be different, the regional security structure different, and there may even be a difference in Iranian nuclear policy if the US leaves Iran with a battered but intact regime.
Both outcomes do not have the same probability, nor are they priced equally. The markets are trading the ceasefire situation, while military realities on the ground continue to reflect the regime change scenario.
A wildcard has also received little or no coverage in the financial press.
Members of Congress were briefed by the Trump Administration on Iran’s stockpile of enriched uranium.
In the event of a regime collapse, approximately 440 kgs. 60% uranium enriched will be mainly located in Isfahan, with no plan verified to seize or secure them. This is a risk that cannot be priced.
The oil market does not price what?
In December, oil was trading at about $60 per barrel. Now, it is trading at over $90; a move of 50% in less than three months.
Strait of Hormuz is responsible for approximately 20 percent of the global gas and oil flows.
Alternative sources cannot replace nearly 15 million barrels of oil per day, so the IEA released its largest amount in reserve ever.
The market may be underpricing disruption without a clear end point. It may underprice disruptions without a defined endpoint.
Iran has shown that drones at low cost can stop traffic on the Hormuz regardless of how many launchers are destroyed.
The strike at a UAE refinery, located near the largest processing facility in the world, has already stopped operations.
While Iran’s ability to launch ballistic missiles is steadily declining, it still has the capability of harassing and interfering with shipping using Shaheds.
Secondary effects are already affecting everyday economic statistics. The price of gas in the US is now approaching $4 per gallon. This was $3 only a few weeks ago. Cost increases for diesel are affecting the freight and food supply chain.
Federal Reserve Chairperson faces President who wants to cut rates while economy is absorbing the equivalent of an increase in supply side tax.
This combination is not known to resolve itself easily.
Who will win the war that rages?
This conflict is not about missiles.
US missile defense systems have already been moved from Indo-Pacific into the Middle East.
China spent many years playing out this exact scenario. It stocked up reserves in the window of low prices, upgraded its automobile fleet and reduced dependence on Hormuz.
Russia receives US sanctions relief for oil exports, and is positioning itself to fill in the LNG gap that Qatar’s infrastructure has left. Both countries benefit from a conflict neither side is involved in.
It is evident that the defence industry has a large presence.
Regardless of the outcome, Lockheed and RTX’s production backlogs for interceptors will continue to grow.
Energy infrastructure is a less obvious topic.
If the Hormuz dispute continues well into 2020, capital will move upstream to the US, Canada and Guyana.
This process has already begun. The Gulf War of Attrition only accelerates the process.
The post Iran’s not winning but pricing US out of the victory might be updated as new developments unfold.
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