00:00How optimistic are you that we will get, that this is headed in the right direction?
00:04Well, I want to be optimistic because obviously that would be good for Hong Kong, Asia, and the world.
00:11However, I think that we need to have some caution here because despite the headlines,
00:18there are quite a few uncertainties, not just after a deal may be inked, but even between now and Friday.
00:25You see, if you listen to the deputy foreign minister of Iran, who is the most senior person to be
00:30speaking about this in detail,
00:32he says that, yes, there will be a signing on Friday, but that presumes there will be some $12 billion
00:40transferred,
00:42the unfrozen funds of Iran transferred right up front before any opening of Hormuz occurs.
00:50And then essentially 60 days later, another $12 billion.
00:57And then this also presumes, according to Iran, that there will be an end to the hostilities by Israel in
01:05Lebanon.
01:05And if we can just simply go five days without Israel attacking Hezbollah or attacking Lebanon,
01:13that would be quite something because that has been going on and heating up, not just calming down.
01:19So I think we maybe have not quite a memorandum of understanding.
01:25I think we have more a memorandum of confusion.
01:28Now, that could be cleared up in a very simple way if both sides would simply release now the statements
01:36that they have agreed to.
01:38And the very fact that they're not relieves this real question about do they actually agree on the terms or
01:48are they saying they want between now and Friday to straighten it out?
01:54I guess what has been more, I guess, urgent and immediate has been at least relief, I guess you could
02:00call it, on reopening the Strait of Hormuz.
02:03How trusting should we believe that things will be back to normal or can it go back to normal, Professor?
02:09Well, it's never going to go back to normal.
02:12So the problems here that Asia is going to face is that Iran has discovered it can close the Strait
02:18of Hormuz whenever it wants, for any reason it wants, with just a handful of drones.
02:23And it might even be able to do it with a handful of emails to the insurance companies.
02:27So this is not going to go away, and this isn't going to go away with any piece of paper
02:32that's inked on Friday.
02:33And this is going to, the leverage of Iran is also not going to disappear, and it's going to grow
02:39over the next few months.
02:41Because you see, those oil inventories are still going to be running down for a good 30 to 60 days.
02:48Once you start this process, this is not like turning on the tap of a faucet in our kitchens, where
02:56the water instantly comes out and goes into the pan.
03:00The problem here is it will take 30 to 60 days before the first drops of oil actually start to
03:06reach the refineries in their markets.
03:09And in that period of time, those inventories are going to run pretty close to dry.
03:15That is their operational minimums.
03:18For the United States, we know that is around from the 348 million barrels of oil in the reserve today.
03:25Their operational minimum is somewhere around 300 million barrels of oil, maybe 270, which means it hits the wall at
03:34the end of July.
03:34And then after that, the caves that are made of salt start to crumble and fall in physically.
03:41So this is not a situation where Iran's leverage is going to disappear.
03:48It's actually going to grow during this 30 to 60 days.
03:53Professor, the last time we spoke was, I think, about two and a half months back.
03:58And I think one thing that stood out from that specific interview, at least to me, was you told us,
04:03watch where the military assets are being placed and where they're being positioned.
04:09Is that still a good indicator of the direction of travel here?
04:13Oh, absolutely.
04:15I mean, if it turns out that President Trump doesn't just end the blockade, but withdraws 50, 70 percent of
04:24the naval assets that have been moved to the region, that's a huge indicator.
04:29If we withdraw, say, 20,000 or 10,000 troops that we have put in since the war, that would
04:39really be a big indicator.
04:40So, for example, if those airborne troops were to be taken out of theater, that would be an indicator.
04:48If the Marines would be physically lifted back to their bases in Asia and also in California, that would be
04:59a major indicator.
05:00But so far, President Trump hasn't said he's going to do that.
05:05So, Professor, in terms of this theory of the escalation trap, where do you think things are and where things
05:13stand now?
05:13We're in what I would call the middle game.
05:15I know everybody wants it to be the end game, and the reason is because the world is heading toward,
05:22the world is like the Titanic, heading to the iceberg of the end of the oil inventories, which are going
05:29to run out around August 1st, August 7th, something like that.
05:34All the oil execs agree, and even I think President Trump agrees, because I think that's why he is so
05:39desperate to get a deal.
05:41He's doing everything I think he can to get a deal, short of accepting a strategic defeat.
05:47However, we are in the middle here because President Trump is not willing to accept a strategic defeat, and what
05:54he wants is Iran to accept a strategic defeat.
05:57Well, let's see if Iran will do that.
05:59Will Iran kowtow to Trump and say, oh, yes, we bow down, we're not going to open the Strait of
06:07Hormuz or close the Strait of Hormuz ever again here?
06:11I think this is going to be a tall order, because would we even really believe Iran's words here?
06:16They've demonstrated the power to close the Strait of Hormuz whenever they want, and the fact is they want more
06:25than just simply selling oil, their own oil.
06:30They want American forces to withdraw.
06:33So what I'm expecting is in this middle game, Iran will probably play the game of leverage to get American
06:41forces to withdraw.
06:42They'll first probably ask for, again, 50, 70 percent of the naval assets to be withdrawn, that is, out of
06:51the region.
06:52Then the next step would be the troops, those troops that were moved in.
06:57They would ask those to be withdrawn.
06:58And then step three would be close down the bases, lock, stock, and barrel of the 13 bases in the
07:05region.
07:06Those are the kinds of things I'm looking for here as the issues in the middle of the escalation trap.
07:15Okay.
07:16A part of me wants to just say, let's not get ahead of ourselves, Professor Pape.
07:21Now, let's just say for argument's sake, this signing coming on Friday does mark the end, or the end of
07:31the tunnel is very much in sight.
07:34What strategic objective do you think Donald Trump was able to achieve?
07:40Let's say this does mark the end.
07:42How do we look at this as a war?
07:43Well, let's assume that the absolute best case for America in the world happens, which is the war is over
07:50on Friday,
07:52and the strait stays open for the next six months or a year with no problems whatsoever.
07:59Then, for President Trump, he will, of course, say that is a victory, but it's not.
08:05It's a clear strategic defeat.
08:07He will be a loser because that is just returning the world to the position of February 27, the pre
08:14-war status quo ante.
08:16Well, we didn't need a war to get to February 27 here.
08:20So the bottom line is that this point I'm making, that Iran can, in the future, close the strait whenever
08:29it wants,
08:30that is going to be true even if it stays open for a year.
08:35This doesn't stop it from closing the strait of Hormuz in the future,
08:40which is why I think we're likely going to have to pay, you know, if we had to pay $24
08:45billion to get to this point,
08:46I think there's a good chance they're going to come up with reasons why we've got to pay more here
08:52and do more if that is going to go forward.
08:55I mean, why exactly are they not going to do that?
08:59What's the reason?
09:00Because they're good humanitarians?
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