Netanhayu and Trump thought attacking Iran was going to be a walk in the park. Today, both realize they have walked into a quagmire.
Their strategy was simple: precision bomb Iran’s military capability and decimate its leadership. That was too simple. It assumed Iran would passively suffer the assault.
Iran had years, even decades, to prepare for exactly this type of attack. Exactly this simplistic military mindset. They prepared to absorb the initial shock. They decentralized command and control. They collected economic intelligence around their region. They hid their most advanced missiles deep in the tall mountain ranges that defined this country. They built tens of thousands of cheap drones capable of asymmetric warfare at high intensity.
Iran did take heavy blows. But the regime did not succumb in the first few days of the massive assault. In response, Tehran set into motion a counter-strategy that redefined the parameters of this war.
Iranian missiles rained down on Israel and nearby Arab states. The headquarters of the US 5th Fleet in Bahrain – billions worth of armaments and communications facilities that took many years to assemble – was destroyed. Fuel processing facilities were flattened. The busiest airports in the world were forced to shut down. Natural gas processing was halted.
If the shutdown continues for a few more days, the pain will multiply incredibly. The Gulf states are almost entirely dependent on desalinated water and nearly all their food is imported. Europe depends on gas imported from the region. The rest of the world depends on oil shipped out through the Strait of Hormuz.
Iran declared a halt to shipping through the vulnerable strait. But it did not need its navy to enforce this. The world’s biggest marine insurers cancelled coverage for the thousands of ships trapped in the Persian Gulf. Maritime traffic slowed to a trickle.
The insurance industry had to do what they did or court a global financial meltdown. Trump ordered a US government agency to provide insurance cover for the oil tankers refusing to traverse the Strait. But this agency may not have the financial clout to accomplish this.
Trump promised US Navy and Air Force escorts for ships moving from the Gulf to transport oil. If this materialized, the cost of protecting the oil tankers will be much higher than the value of the cargo being protected. This is unsustainable.
When the Houthis blocked access to the Red Sea, the US tried escorting merchant traffic through. That proved unsustainable. Higher shipping costs for taking cargo around Africa stoked inflation.
Iran simply outsmarted the US and Israel in this game by making warfare multidimensional. It costs the US 600 times more to intercept a crude incoming missile fired by Iran. In the first days of this battle, Washington proudly declared they were intercepting 90 percent of missiles fired at the Gulf states. But they were shooting down obsolete missiles fired precisely to exhaust the air defense system.
Last heard, the US was pulling out missile defense batteries from South Korea and Japan to replenish their exhausted systems around Iran. The carrier battlegroup had to be repositioned out of range of Iranian missiles. Munitions adequacy is now an issue for the attacking forces.
Meanwhile, Iran is rolling out its more modern missiles to hit Israel and the Arab states aligned with the US. They did their combat accounting correctly. Now the war will have to be stretched out.
Stagflation
The Philippines is among the most vulnerable in this war – even if it is happening far from our shores.
We are entirely dependent on oil imports and much of our natural gas needs. We have two million migrant workers in the affected region. If the fighting extends for another week, tens of thousands of our workers will decide they want repatriation. We do not have the logistics capacity to evacuate them all at once.
Massive repatriation of our workers will lead to a drop in remittances. Our economy, in its present weak condition, cannot afford this loss.
The oil delivery predicament will force pump prices to spike – perhaps to over P100 per liter. This will stoke inflation. At the moment, some analysts are expecting our inflation rate to jump up to about seven percent. The economic pressure on our wage earners will be severe.
Some are suggesting that government temporarily scrap excise taxes on fuel. This will bring little relief but also cause serious fiscal problems down the road. Government will have to borrow to compensate for the loss of revenues from the excise taxes.
For 2025, our budget deficit ran to P1.58 trillion – way beyond original targets. We were forced to borrow to cover the funding gap (even if much of this was stolen by the band of plunderers). If we take out the fuel excise taxes, we will have an even bigger deficit this year and incur a much larger debt obligation. This will push us closer to another debt crisis.
We are not just facing external headwinds. We are facing a global economic tsunami. Our exports will drop further. Direct investments will be disappointing. Higher costs will force many small enterprises out of business.
In a word, we are staring at the possibility of prolonged stagflation: stagnant growth coupled with high inflation. This is not happy news.