The Iranian Navy is playing with oil prices

A recent 10-day training exercise conducted by Iran's Navy included a test of an upgraded anti-ship cruise missile, presumably designed to counter the regular presence of U.S. 5th Fleet warships nearby. Before the Iranian exercise began, the USS John C. Stennis aircraft carrier strike group sailed from the Persian Gulf to the Arabian Sea. The carrier received some parting advice from Gen. Ataollah Salehi, the commander of Iran's armed forces. "We warn this ship, which is considered a threat to us, not to come back, and we do not repeat our words twice," Salehi said.

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It would be difficult to find a credible naval analyst who thought that a clash between the Iranian Navy and the U.S. 5th Fleet would turn out well for Iran. But Tehran has apparently doubled down on Salehi's warning; the Iranian parliament is now considering a bill that would prohibit foreign warships from entering the Persian Gulf without prior permission from the Iranian government. This would violate long-standing international maritime law.

In contrast to its occasional all-thumbs response to irregular warfare situations, a conventional naval battle around the Strait of Hormuz would play to the U.S. military's strongest suit. American advantages in sensors, targeting, command and control, precision weapons, electronic warfare, training, and many other dimensions would quickly crush Iran's air and naval forces. Iran would also be unlikely to derive any political or diplomatic benefit from sparking a clash in the strait. Even competitors like China would expect the United States to fulfill its role as protector of the global commons (at least in the Strait of Hormuz). Iran would be seen as violating international maritime law. And the more the shooting accelerated, the more Iran would suffer. This is the definition of "escalation dominance," which would favor the United States as fighting intensified (and might therefore give the United States an incentive to escalate an outbreak of combat). Salehi and his officers must surely understand this.

So what is Iran up to? The looming imposition of U.S. sanctions on Iran's Central Bank and by Europe and perhaps Japan and South Korea on Iranian oil exports might force Iran to have to sell its oil to its few remaining customers at a discount from market prices. To make up for this lost revenue, Iran might find saber rattling a useful way of boosting crude oil prices. Whether Iran can sustain such a risk premium without actual shooting occurring at some point remains in doubt.

We might see Iran resorting to its own strong suit: covert action and irregular warfare. Tehran's goal would be to impose economic and political pain on the United States, Europe, China, and other oil importers and boost the oil-market risk premium to its own financial benefit. Iran might attempt to achieve this by clandestinely laying naval mines in tanker shipping lanes, as it did during the Tanker War of the 1980s. The result then was an escalating naval confrontation that culminated in the U.S. Navy's Operation Praying Mantis in 1988, a defeat for the Iranian Navy.

Alternatively, Iran might opt to disrupt the global oil market by sabotaging Iraqi, Kuwaiti, or Saudi oil fields. Such actions would be reckless and would be politically damaging to Iran if discovered.

The simmering standoff between Iran and the United States has some parallels with the origins of the Pacific war in 1941. To persuade Japan to withdraw its marauding army from China, the United States and other countries imposed ever-tightening sanctions, culminating with an oil embargo that put Japan's back to the wall. It was politically impossible for President Franklin D. Roosevelt to enter the war without a grave provocation, even if allies were urging him to do just that. But after Japan's attack on Pearl Harbor and elsewhere, America's great industrial advantage became decisive. Similarly, it's politically untenable for President Barack Obama to fire the first shot at Iran. But Iranian military action that, say, closes the Strait of Hormuz for a time could result in the world's begging for U.S. military action.

Few doubt that Japan's policymakers blundered badly when they opted for war against the United States. Yet these leaders also thought it was impossible to abandon their China policy. Iranian leaders are caught between demands for full International Atomic Energy Agency inspections of its nuclear program and the U.S. 5th Fleet. Iran may have a card or two left to play, but it would be illogical for shooting to be one of them.

After a decade at war, foot soldiers get the pink slips

On the morning of Thursday, Jan. 5, President Barack Obama, Defense Secretary Leon Panetta, and other defense officials unveiled the outline of the Pentagon's new defense strategy, which Panetta described as a "strategic shift" to the future. The presentation included only broad strategic guidance, and officials refused to discuss the new strategy's consequences for specific programs or budgets. The task for Obama, Panetta and others at the briefing was to reassure both allies and adversaries about the future of U.S. military power while simultaneously explaining how Pentagon planners were going to get by with $487 billion less than they recently expected. Panetta and others at the podium acknowledged some of the risks that would result. How potential adversaries will interpret the new strategy remains to be seen.

The new strategic guidance ignores the additional $600 billion defense-budget sequestration that was triggered in November by the failure of the deficit-reduction supercommittee and that is due to strike in 2013. At the briefing, Deputy Defense Secretary Ashton Carter said the upcoming Pentagon budget, absorbing the $487 billion blow, will be stunning enough to many on Capitol Hill. Boeing's announcement on Thursday that it is closing a large aircraft plant in Kansas, with the possible loss of 2,160 jobs, may foreshadow some of the economic pain to come, even after the Congress presumably voids the impending sequester.

Without discussing numbers, Panetta and his colleagues warned of deep cuts to the Army and Marine Corps. The accompanying strategic guidance document plainly states that "U.S. forces will no longer be sized to conduct large-scale, prolonged stability operations" [italics in original]. It will be difficult to find many observers agitating for more "large-scale, prolonged stability operations." The risk, however, is that the United States could find itself caught short by simultaneous crises that boil over before the Pentagon can mobilize, retrain, and deploy Army and Marine Corps reservists.

The ability to cope with two major regional crises nearly simultaneously is a long-standing assumption that the Pentagon has been edging away from for a decade. The Obama administration is now definitively abandoning it. In the case of multiple crises in the future, the United States may find itself using heavy air and naval firepower in scenarios that in the past might have been deterred by the timely deployment of ground troops, troops that in the future might not be available.

The administration's new strategy is also likely to take an ax to the forward presence of U.S. forces, especially outside the Asia-Pacific region. Panetta said that the U.S. presence in Europe will "adapt and evolve," which is a synonym for European base closures, troop withdrawals, and a downgraded relationship with NATO. Given the low external security threat to Europe (a sharp contrast with Asia), this makes some sense. Europe, however, remains an important transit hub for U.S. operations in the Middle East. The result will be one more strategic risk the Obama team apparently thinks it will be able to manage.

While ground-force staffing, personnel costs, and some weapon systems will be cut or delayed, there are winners in the strategic review. Special operations forces, cyberwarfare programs, unmanned systems, and intelligence gathering will get more funding. More broadly, the new strategy is counting on forces that will be, in Panetta's words, "more agile, more flexible, ready to deploy quickly, innovative, and technologically advanced" to make up for what these forces previously possessed in numbers. How those troops that survive the budget cuts will become more agile, flexible, and innovative remains to be explained.

Interestingly, it was the Joint Chiefs chairman, Gen. Martin Dempsey, and vice chairman, Adm. James Winnefeld, who stressed the need to retain a capacity to regenerate forces and capabilities during future crises. Winnefeld described the need to be "humble" regarding this or any strategy and thus to make no irreversible decisions. Dempsey defended the strategy as being the right one for this moment in time, implying that as circumstances change, so will the strategy.

Dempsey and Winnefeld may be resigning themselves to a repeat of this budget-and-strategy drill in less than a year, under either a new Republican president or changed circumstances as Obama's second term begins. In the meantime, the reality of defense cuts will soon arrive on Capitol Hill, in constituencies in Kansas and elsewhere, and in the perceptions and calculations of Washington's friends and adversaries.