Iran Holds Big Bargaining Chips in Dispute

Neil King Jr. and Farnaz Fassihi, The Wall Street Journal:

President Bush says the world is "coalescing around the notion" that Iran must be barred from getting nuclear weapons. But two factors -- soaring oil prices and chaos in Iraq -- are giving Tehran new muscle in its diplomatic standoff with Europe and the U.S.

Iran's role as both an oil producer at a time of record prices and as a player in the politics of neighboring Iraq have made it trickier for the Bush administration to get tough on Tehran in the nuclear showdown. The administration has threatened to seek United Nations sanctions against Iran in the fall if the country refuses to accept international oversight of its nuclear program.

For their part, Iran's leaders seem to sense their advantages. In recent weeks, they have made clear they believe they have plenty of leverage and are less vulnerable to economic pressures from the outside. The country's new, hard-line president, Mahmoud Ahmadinejad, recently said "no economic or political incentive can dissuade us from getting peaceful nuclear energy."

A State Department official said the Bush administration has noted Iran's "new defiance" but believes it is symptomatic of "a new overconfidence by the Iranian regime in its level of international support."

A diplomatic effort to contain Iran's nuclear program -- led by Britain, Germany and France and supported by the U.S. -- hit a serious snag two weeks ago, when Iran rejected a package of political and economic incentives offered in return for abandoning its nuclear-enrichment program. Iran then resumed work at a uranium-conversion plant in Isfahan -- a step that could assist in making nuclear weapons, though Iran says it seeks only civilian nuclear power.

The restart prompted a rebuke from the International Atomic Energy Agency and Western vows to take the matter up at the U.N. when heads of state meet there next month.

The nuclear standoff comes at a particularly inopportune time for the Bush administration. In Iraq, the administration is scrambling to help the country's factions overcome differences and hammer out a constitution, taking a crucial step toward solidifying the country so U.S. troops might eventually withdraw.

Iran, which shares a long border with Iraq, has huge sway over much of Iraq's now-dominant Shiite population, and it could disrupt the constitutional process if it so chose. Western diplomats in Tehran say Iranian officials have been blunt in recent weeks on that point, threatening to cause problems in Iraq if the Bush administration tries to punish Iran with international sanctions.

The most influential man in Iraq, Grand Ayatollah Ali Sistani, a Shiite leader whose approval has been central to every political twist and turn, is Iranian. When Iran's foreign minister, Kamal Kharazi, visited Iraq recently he visited Mr. Sistani -- an audience so far denied to top U.S. officials. "It didn't exactly please us to see the Iranians getting face time with Sistani," said a senior American diplomat in Iraq.

At the same time, oil prices have become a domestic thorn for President Bush, and any move that might push them higher could cost him support. Oil hit a nominal record of more than $66 a barrel last week before slipping slightly to $63.25 a barrel yesterday in New York trading.

Iran pumps around 3.5 million barrels a day, or about 4% of global oil production. It is the second-largest producer of oil in the Organization of Petroleum Exporting Countries and has the world's second-largest natural-gas fields. Analysts are divided over whether Tehran would openly use its energy leverage in a diplomatic standoff, if only because the Iranian government is so dependent on oil revenue.

Officials in Tehran, however, have suggested that they might move to crimp tanker flows through the crucial Strait of Hormuz, which would have far-more-serious consequences. Around 15 million barrels of oil a day, and a large percentage of the world's gas supplies, flow through Hormuz. The Energy Department calls the strait "by far the world's most important oil chokepoint."

"We have told the Europeans very clearly that if any country wants to deal with Iran in an illogical and arrogant way...we will block the Strait of Hormuz," said Mohammad Saeedi, a spokesman for Iran's Center for Nuclear Energy, which runs the country's nuclear facilities and uranium-enrichment program. READ MORE

High oil prices also have protected Tehran from outside leverage. Not only has the country's economy benefited, but Tehran also has made a successful push in recent years to slash its international debt and to strengthen ties as an energy provider to developing countries such as China and India.

"Iran's vulnerability to outside economic pressures couldn't be much lower than it is right now," said Patrick Clawson, a regional expert at the Washington Institute for Near East Policy.

Still, some analysts contend Iran is by no means immune to outside pressure. Kenneth Pollack of the Brookings Institution in Washington said the U.S. could get Iran's attention with a push among the Group of Eight leading nations to impose a ban on major investment in Iran.

"Right now, they are fat and happy with the price of oil," Mr. Pollack said. "But that won't bail them out of their long-term economic problems. For that, they need the kind of investments that can only come from outside."

The diplomatic impasse between Europe and Iran has led even some Republicans in Congress to call for President Bush to open direct talks with Tehran, a move no U.S. president has made since Washington cut off diplomatic ties with Iran in 1980.

Write to Neil King Jr. at neil.king@wsj.com and Farnaz Fassihi at farnaz.fassihi@wsj.com.