In September 1980, fearful of the fiery Islamic revolution in neighboring Iran and taking advantage of the resulting chaos (including Western sanctions), Iraq invaded. At the time, Iraq was flush with cash thanks to high oil prices resulting from the 1973 OPEC oil embargo. Taking Iran’s oil fields would drastically increase Iraq’s oil export revenue and make it the dominant power in the Middle East. Unfortunately for Iraqi dictator Saddam Hussein, the “easy victory” turned out to be anything but—Iran fought back fiercely and skillfully. How did eight years of bloody warfare affect economies around the world, both in the 1980s and today?
Setting the Stage: OPEC Oil Embargo of 1973
Most Americans knew relatively little about the Middle East until 1973, when the Yom Kippur War erupted as Israel—a staunch US ally in the region—was attacked by the surrounding Arab states. With US assistance, Israel beat back the assault and won the war. In retaliation for US aid to Israel, the cartel (business model featuring organized limits on output to maintain high prices) of the Organization of the Petroleum Exporting Countries, or OPEC, placed an embargo on the United States. This caused oil prices, and subsequently gasoline and diesel fuel prices, to skyrocket. The United States was hit with fuel shortages and experienced stagflation, or inflation caused by higher costs of production.
One of the participants in the Yom Kippur War was Iraq. To the west of Iraq was neighboring Iran, which produced about three times as much oil. Despite being a member of OPEC, Iran’s oil industry was heavily influenced by a consortium of American oil companies, which had been given control of about 40 percent of Iran’s oil in a 1954 agreement. The Arab members of OPEC ended their embargo of Israel’s allies in 1974, but the West knew to pay attention to the region due to their heavy reliance on OPEC’s oil. The oil crisis in the US hurt President Richard Nixon, making him more susceptible to public anger from the Watergate scandal.
Setting the Stage: Iran’s Destabilized Economy in ‘79
In 1978, revolutionary fervor was increasing in Iran, which had a pro-Western government that was installed in a 1953 coup backed by the United States and Britain. Oil workers went on strike in October, reducing Iran’s oil exports to essentially zero. This reduced world oil supplies between 5 and 7 percent, triggering another spike in oil prices and raising fears of a new oil crisis. The public turned on Iran’s monarch leader, the Shah, and he was forced to flee the country in January 1979. Ayatollah Ruhollah Khomeini, a religious leader, quickly became Iran’s new de facto ruler.
Khomeini condemned the West, Israel, and the Soviet Union for their capitalist imperialism and atheism, respectively. Thousands of perceived opponents to the Ayatollah’s strict Islamist regime, including communists, were executed. The Iranian Revolution stripped the West of a major ally in the Middle East and made many Islamic countries fearful of a ripple effect of violent revolutions. On November 4, 1979, pro-revolution protesters stormed the US embassy in Tehran, sparking the Iran Hostage Crisis as over fifty American embassy employees were taken captive.
Setting the Stage: Economic Sanctions on Iran
The United States, led by Democratic president Jimmy Carter, swiftly froze all Iranian assets it could in the wake of the hostage-taking. All diplomatic relations between the two governments were severed, and US allies like Britain and France (in 1987) also severed ties and levied economic sanctions. This loss of international trade and increase in domestic turmoil in Iran was a significant blow to its economy. Specifically, its major industry—petroleum—was harmed by the exodus of skilled foreign workers and oil companies.
Although not socialist or communist, the theocratic regime of Ayatollah Khomeini quickly nationalized most major industries in Iran. Exports were reduced as Iran attempted to become largely self-sufficient. This economic weakness was noticed by neighboring Iraq, whose dictator Saddam Hussein feared the potential spread of Iran’s revolution. The Shia Muslim minority in Iraq might be influenced by the Shia revolutionaries next door. Additionally, Saddam was tempted by the possibility of capturing a chunk of Iran’s larger oil production and securing waterways in the Persian Gulf. Thus, on September 22, 1980, Saddam struck with an organized invasion.
Early 1980s: Iraq Spends Big to Keep Public Happy
As Iraq was not threatened by Iran, Saddam could not ask his public to suffer hardships in the name of self-protection. Therefore, he spent lavishly to try to insulate the civilian economy from the rigors of war. This meant maintaining construction on public works and infrastructure and increasing Western imports. One example was Iraq importing thousands of specially-made Chevy Malibus, designed for Iraq’s desert climate and rough roads, in 1981. Although the Malibus were allegedly of poor quality, angering Saddam Hussein, they kept civilians relatively mobile.
Unfortunately for Saddam, the war was amazingly expensive and quickly ate through accumulated oil wealth from the 1970s. By 1982, Iran had forced Iraqi units out of its territory and went on the offensive. At this point, Saddam had to change tactics and declare to his people that Iraq was under attack. Thus, the generous spending on civilian projects and imports decreased, and expenditures on the military increased. Rising costs, plus casualties, began to weaken Saddam’s public support after 1982.
Iran-Iraq War Roils Oil Market, Triggers Crash of ‘83
The beginning of the Iran-Iraq War in 1980 caused oil prices to spike due to fears of both nations’ oil industries collapsing. Quickly, importers began looking for other sources of petroleum and invested greater amounts in both alternative energy sources and making their use of oil more efficient. Additionally, lots of domestic oil production that had begun during the OPEC oil embargo of 1973 came on-line in the early 1980s. Therefore, despite the turmoil in the Middle East, the West actually had more oil available by the autumn of 1983 than it did in 1973.
Despite a 1982 attempt by OPEC to keep prices high by reducing output, the West had reduced its demand for oil to a more reasonable level, keeping prices steady instead. Oil importers were also abandoning long-term contracts in favor of the spot market, or short-term contracts aided by modern communications, to buy the cheapest oil possible. This advantaged new oil exporters, like Mexico, and reduced dependence on traditional OPEC giants like Iran and Iraq. In the autumn of 1983, oil prices began plummeting, bottoming out in 1986.
The Tanker War
Not surprisingly, the two nations sought to cripple each other’s oil industries. Oil tankers traveling to Iraq had to go through the Strait of Hormuz between Iran and the United Arab Emirates (UAE), placing them very close to Iran due to the narrow width of the strait. Beginning in May 1981, both countries targeted commercial ships coming to trade with the rival. Ships that passed through the Strait of Hormuz to arrive at Iranian ports in the Persian Gulf were targeted by Iraq. In April 1983, Iraqi jets bombed offshore Iranian oil rigs, causing fires and oil spills that lingered for almost two years.
In 1984, Iran began retaliating in earnest after Iraq received French fighter jets and missiles that expanded its combat range. With less heavy equipment than Iraq, Iranian missile strikes on ships were less lethal—they often used anti-tank missiles. In 1987, there was an increase in the number of ship attacks, as well as attacks on ships from nations previously unchallenged, including the United States and the Soviet Union. That year finally saw a concerted international effort to protect oil supplies coming through the Persian Gulf, such as Operation Earnest Will to protect oil tankers from Iran by using US naval escorts.
Iraq Amasses Huge Debts, Hurting Its Economy
Iraq benefited from tremendous international aid during the eight-year war…but most of it required at least some Iraqi spending. As a result, Iraq ended the war with heavy debts of up to $80 billion. Of this, almost $40 billion was owed to allies in the Middle East itself, especially its southern neighbor, Kuwait. As a result of the lengthy war and an annual $3 billion cost of servicing its debt, Iraq’s economy was in poor shape. Around half of its oil revenue was required to service the debt in 1989, and Iraq had few other exports.
The cost of repairing war damage was estimated to be over $200 billion, and inflation was high due to wartime spending. Controversially, Saddam Hussein maintained high defense spending after the war in 1988, posturing himself as the “strongman” of the Arab nations. Allegedly, Saddam felt that he could use his military strength to intimidate surrounding states into favorable treatment. He was popular, and Iraq was considered a relatively well-developed country as 1990 rolled around. However, the economic situation was likely to deteriorate if the debt dilemma could not be solved.
Post-War: Iraq Debts Trigger Invasion of Kuwait
Saddam Hussein asked Kuwait and the United Arab Emirates (UAE) to forgive Iraq’s debts, arguing that it protected the two small states and the Arab nations at large from “Iranian expansionism.” Both states refused to forgive Iraq’s debt, prompting Iraq to complain that Kuwait was stealing its oil through slant-drilling into Iraq. With his military one of the largest in the world in 1990, Saddam began making threats, insinuating that Kuwait had once been part of Iraq.
On August 2, 1990, Iraq invaded Kuwait and quickly incorporated it as a new province. Not only would this cancel Iraq’s debt to Kuwait, but it could use Kuwaiti oil revenue to pay off its other debts and bolster its sagging economy. Unfortunately for Saddam, the world took notice and was not distracted by the end of the Cold War. A coalition of nations led by the United States demanded that Iraq leave Kuwait. When Saddam refused, the coalition began amassing a large force stationed in surrounding nations, including Saudi Arabia. This led to the Gulf War of 1990-91.
Post-War: Iran Isolation Boosts Domestic Production
By 1988, Iran was under economic sanctions from most countries, including the Soviet Union and China. Because it received much less assistance than Iraq, both militarily and financially, Iran was forced to develop its domestic arms production. The war devastated Iran’s economy, but citizens largely rallied around Ayatollah Khomeini, who labeled it the “Sacred Defense.” Iran realized that it could not compete with Westernized and well-supplied opponents, so it turned to developing asymmetric capabilities during the Iran-Iraq War. This trend continued after the war, as Iran remained an ideological foe of the West.
Iran invested heavily in both conventional weapon and nuclear weapon production in the 1990s. Continued economic sanctions due to Iran’s alleged support for terrorism and its pursuit of weapons of mass destruction (WMDs) severely limited its economic growth, with GDP growth in the late 1990s half that of its population. However, the redistribution of wealth under the strict theocratic government helped create populist support, preventing mass unrest. Thus, the Iran-Iraq War helped Iran’s leadership survive Western economic sanctions by creating a loyal and battle-hardened population.
Aftermath: “Do It Yourself” Iran a Formidable Foe
In the 35 years since the end of the Iran-Iraq War, Iran has become the dominant military power in the Middle East. Despite Western sanctions, it has built a large ballistic missile force, allowing it to strike enemies hundreds of miles from its borders. Although it cannot compete with the United States or Israel in battlefield armor, Iran has developed many fighting organizations—some labeled terrorist groups—that can engage in guerrilla warfare far behind battle lines. Most recently, Iran has become widely known for its drone capabilities and even exports armed drones to Russia for its war in Ukraine.
Although the West has seemingly curtailed Iran’s pursuit of nuclear weapons, at least for now, Iran is believed to have developed significant hacking capabilities. These could be used to great effect in damaging an enemy’s infrastructure. Ultimately, the Iran-Iraq War helped mold Iran into a tough, innovative fighter that excels at asymmetrical and unconventional warfare. How effective this would be against a modernized coalition like NATO, which it vehemently opposes, remains to be seen.
