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September 26, 2024
The Cost

🇺🇸🇨🇳🇮🇱 What will the surge of US forces to the Middle East cost the military?

The day the Middle East almost erupted into a full regional war this summer, Lloyd Austin was touring an Asian shipyard.

Just before the defense secretary visited Subic Bay, Philippines, the former site of a massive U.S. Navy base, Israel killed the political leader of Hamas, who was visiting Iran.

Austin’s July visit was meant to show his focus on Asia, the region America says is its top priority. Instead, he ended the trip distracted by the Middle East, spending hours containing the crisis on a flight back to Washington.

Since Oct. 7, when Hamas’ attack on Israel provoked all-out war in Gaza, the Pentagon has been on call. When the region has approached a wider war, the Defense Department surged forces there to calm it down. But after a year, some in Congress and the Pentagon are growing concerned about how to sustain that pace, and what it will cost the military in the long term.

Call it the U.S. Central Command squeeze. The Pentagon insists its surge has helped stop the Middle East from falling into chaos. But the longer the region borders on conflict, the more the U.S. tests its endurance for crises later on, most notably, a future conflict with China.

The pressure on the military increased even further this week. After their most intense attacks in almost 20 years, Israel and the Lebanese militia group Hezbollah are close to a larger war. On Monday, Austin yet again ordered more troops to the region, joining 40,000 other American personnel there, 6,000 more than normal. Another aircraft carrier may soon follow.

“We’re caught in this kind of never-ending quagmire of having to divert resources, and we’re burning [out] on the back end,” a senior congressional aide said.

Their message was that America’s military wouldn’t exhaust itself anytime soon, but that a year of unplanned deployments and spent missiles come with a cost. Even more, they said, the longer the crisis continues, the more the Pentagon will have to manage tradeoffs between the urgent needs of the Middle East and the rising challenges of the Indo-Pacific.

Pentagon leaders say they calculate the risk in pulling assets from one region to another, and that the choice to move forces away from Asia is a sign that they consider the region stable enough to do so.

“I have relayed messages that it is better to invest in deterrence where there is no overt conflict, rather than intervene in a conflict where there is one already,” the Philippines Secretary of National Defense Gilberto Teodoro said in an August interview. He wouldn’t specify who in the U.S. those messages have reached.

That said, the cost of this posture is also becoming clearer.

The first, and perhaps the most important, part of that tally is the military’s ability to meet future needs, known as “readiness” in defense jargon. By sending more forces to the Middle East, the Pentagon is accepting what amounts to a mortgage: higher costs on its forces to avoid an even bigger bill.

Without specifying the impact of these extensions so far, multiple defense officials and congressional aides said the U.S. is already having to manage “tradeoffs” between the needs of the Middle East today and other areas in the future.

This February, the Houthis shot a ballistic missile at the Navy destroyer Gravely in the Red Sea, one of many times the militia group targeted American ships in the waterway.

But this one came close. In fact, the ship used a short-range weapon — rather than the typical missile — to intercept the attack. The Houthis came within a nautical mile of success, according to Navy officials.

This is an example of the other two costs involved in the Pentagon’s response.

The Navy estimates that between Oct. 7 and mid-July, it fired $1.16 billion worth of munitions while on station in the Red Sea.

đź”— https://www.defensenews.com/pentagon/2024/09/25/what-will-the-surge-of-us-forces-to-the-middle-east-cost-the-military/

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🛢 We Are 'Still' Going Full Speed Into The Wall

Product storage is about to get tighter unless China steps in and lifts the product export ban. If it does, expect a meaningful reversal in crude.

WTI is barely hanging on to $70 for its dear life, but please remember that consumers use petroleum products like gasoline and diesel; they don’t use crude oil. Refineries do, and this is why it was always important for us to pay attention to crack spreads along with crude timespreads.

Note: Please divide it by 3.

The fever in the market today is that crude is oversupplied, but products are undersupplied. How can this be possible?

Well, China’s June crude import data so far is -4.7 million b/d y-o-y, and teapot refineries are operating at 50% utilization. Compared to US refineries operating at 95% and PADD 2 refineries operating over 100%, you can see where the disconnect is.

But here’s the thing. If end-user demand isn’t down and you still have a production shut-in of ~8 million...

Beginning

🇮🇷🚫🚢 Here's my analysis of the Strait of Hormuz situation for the last 24 hours.

As I noted yesterday, I was seeing a lot of vessels using the Oman route to exit. This was following the announcement by Oman and IMO. The IRGC retaliated today on a vessel, but even after the attack, I am still seeing transits. It's a lot less, but there are vessels willing to take the risk.

On the inbound front, the flow is still heavily restricted. Whatever outflow we are seeing today is unsustainable as there are not enough non-Iranian tankers going in. In particular, we need empty VLCCs going in to load up crude. This is just a trickle so far.

In my view, the traffic in the Oman lane will lead to more escalation by IRGC. Without throttling flows entirely in the Southern lane, IRGC will lose control of its leverage over the Strait. If they act, then it's a question of what the US does after.

I think this is only the beginning.

đź”— @HFI_Research

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