Using 'Oil Weapon' Would Hurt Iran, Too

Since 08-07-06

By Patrick Goodenough
CNSNews.com International Editor

August 07, 2006
http://www.cnsnews.com/ViewSpecialReports.asp?Page=/SpecialReports/archive/200608/SPE20060807a.html

(CNSNews.com) - Iran on Sunday raised the specter of using oil as a weapon against the West if it is subjected to U.N. sanctions for its nuclear programs, but some experts argue that Iran's economy is a lot more fragile and vulnerable to damage than its huge oil wealth would suggest.

Tehran's chief nuclear negotiator, Ali Larijani, told a press conference Iran plans to expand its uranium enrichment activities. Such a move would defy a recent U.N. Security Council resolution demanding it suspend the controversial work by the end of the month.

Larijani also warned that Iran may end International Atomic Energy Agency (IAEA) access to its nuclear facilities, depending on the steps taken by the U.N.

The United States and its allies suspect that Iran's ostensibly civilian nuclear energy program is providing a cover for efforts to develop a nuclear weapons capability.

Larijani's comment is the clearest indication yet of the stance Iran looks likely to take when it formally replies later this month to a carrot-and-stick package offered last June by the U.S., Britain, China, France, Russia and Germany.

The package offered diplomatic and trade incentives to Tehran in return for halting its nuclear activities. The U.N. resolution was passed after Iran missed an earlier deadline to respond. President Mahmoud Ahmadinejad has said Iran will give its answer on August 22.

The Security Council has decided that if Iran does not comply by August 31, it will consider sanctions.

Larijani warned that if the U.N. does impose sanctions, "we will react in a way that would be painful for them. They should not think that they can hurt us and we would stand still without a reaction."

He said Iran did not wish to use the "oil weapon," but added that "it is they who would impose it upon us."

"Do not force us to do something that will make people shiver in the cold," Larijani said. "We do not want that."

Iran is the world's fourth-biggest exporter of crude oil, and world markets have been jittery about the effect on already-high oil prices should the long running nuclear standoff come to a head.

For that reason, there has been little talk of the likelihood of Iranian oil exports being included in any package of sanctions that may be introduced if Tehran does not back down.

If Iran itself were to retaliate for sanctions by suspending the flow of crude oil to world markets, that too would have a severe impact on prices, many economists warn.

On the other hand, the U.S. Department of Energy's Energy Information Administration says Iran obtains 80-90 percent of its export earnings, and 40-50 percent of the government budget from energy supplies. Closing the spigots for any sustained length of time would hit Iran hard.

In recent testimony to two congressional committees, Ilan Berman of the American Foreign Policy Council (AFPC) said making good on its threat would hold economic and political risks for Iran.

If Iran withdrew its crude from world markets, it could lose important long-term clients such as India and China, who would look quickly for other suppliers.

Iran's political allies may also be less likely to give Tehran's nuclear program unconditional support if their economies are hurt by the oil cutoff, he said.

Furthermore, Iranian interference in the global energy market may mean an end to the absence of consensus in the international community over whether to take more robust measures against Iran.

Vulnerabilities

Berman, who is vice president for policy at the Washington-based think tank, spelled out at least three key areas of vulnerability in the Iranian economy.

Despite its substantial oil exports, Iran relies on outside countries for refined petroleum products, buying more than one-third of its gasoline from abroad at an estimated annual cost of more than $3 billion, he said. Sources for these supplies include France, India, Turkey and China.

Imposing an embargo of gasoline to Iran could result in the rapid depletion of hard currency reserves and lead to work stoppages in many industrial sectors.

Secondly, the regime's economic structure is highly centralized, and dominated by a small number of powerful families - including that of former president Hashemi Rafsanjani - as well as supposedly charitable foundations overseen by "supreme leader," Ali Khamenei.

"Given this economic hierarchy, targeted financial measures that restrict the ability of these individuals and organizations to access international markets -- and curtail their capacity to engage in commerce -- are likely to have an immediate and pronounced effect on regime decision-making," Berman said.

The third vulnerability related to Iran's dependence on foreign direct investment, which it requires to maintain energy production at current levels.

"Through economic measures that target these weaknesses, the United States and its international allies have the ability to substantially influence regime decision-making - and, potentially, to galvanize serious domestic unrest within the Islamic Republic as well," he told lawmakers.

Heritage Foundation research fellow James Phillips earlier this year painted a bleak picture of Iran's economy, despite it having benefited from strong oil and natural gas prices.

"The mullahs have sabotaged economic growth through the expansion of state control of the economy, econom/-ic mismanagement, and corruption," he said.

"Annual per capita income is only about two-thirds of what it was at the time of the 1979 revolution."

Phillips said many Iranian businessmen understood that their country's economic future depended on access to world markets, foreign investment and trade.

Sanctions on Iran should focus on denying it loans, foreign investment, and favorable trade deals, he said, arguing especially in favor of banning gasoline shipments to Iran.

"This would significantly drive up the price of Iranian gasoline and underscore to the Iranian people the shortsighted policies of Iran's rul/-ing regime."

UN or not?

Since the dispute erupted after a regime critic exposed Iran's clandestine nuclear program in 2002, the Security Council has struggled to reach consensus on how to deal with the issue.

China and Russia, key economic and political partners of Iran, were instrumental in blocking efforts to take a firm stance towards Tehran.

The two eventually agreed to back a resolution on July 31, but even then ensured that if Iran does miss the Aug. 31 deadline, "further decisions" by the council will be required before sanctions are adopted.

Critics of the Chinese and Russian positions argue that even if they do eventually agree to sanctions, they will likely demand that they are limited and gradual.

In the meantime, they say, the council wrangling that has already taken place has enabled Iran to strengthen its position and work on reducing its economic vulnerabilities.

Phillips said because experience had shown the U.S. could not rely on the U.N., it should make contingency plans to work with allies like Brit/-ain, France, Germany, the European Union and Japan to impose sanctions outside the U.N. framework if necessary.

Berman, too, said Washington should not rely on the U.N. but work on building an economic coalition outside the confines of the world body.

This would enable the U.S. and its allies to control the timing, extent and application of economic pressure, and give them "greater political flexibility to apply those specific measures most likely to alter Iranian behavior," he said.

"What we've seen from the Iranians over the last 15 years is that they are hypersensitive to threats to their economy," Brookings Institution scholar Kenneth Pollack told a Council on Foreign Relations symposium last April.

"Everything that they have been trying to do ... is to keep the United States and Europe from coming to a common position on economic sanctions against them," he said. "That is their great nightmare."