Iran's "Oil Weapon" is a Double-edged Sword

Ilan Berman, National Review Online:

Who’s afraid of Iranian oil power? If the Islamic Republic of Iran has its way, the West will be.

In recent weeks, as the international crisis over Iran’s runaway nuclear ambitions has deepened, officials in Tehran have repeatedly rattled their sabers about energy, raising the prospect of a disruption of energy trade in the Persian Gulf. Most recently, Iran’s supreme leader himself has warned publicly that the West could face disruptions in fuel shipments from the Persian Gulf if it makes a “wrong move” against Iran.

Iranian officials have every reason to feel confident in making such threats. After all, the Islamic Republic is now a bona fide energy superpower. Home to 10 percent or more of world oil, it is the second largest exporter in the Organization of Petroleum Exporting Countries (OPEC), and produces an average of 3.9 million barrels of oil per day. To boot, with 940 trillion cubic feet of reserves, Iran is second only to Russia in natural gas wealth. And, intelligence analysts say, a combination of advantageous geography and a sustained national rearmament has given Iran the ability to dominate, at least temporarily, the Strait of Hormuz, the principal passageway for roughly two fifths of world oil trade. What’s more, thanks to a series of blockbuster energy deals over the past couple of years, the Islamic Republic quite literally now has some of the world’s largest economies over a barrel.

But is energy really Iran’s trump card, as some have suggested? In fact, a closer look indicates that the “oil weapon”—whether in the form of reductions in Iranian output or military moves in the Hormuz Strait—is likely to be a double-edged sword for the Islamic Republic. READ MORE

For all of its energy clout, the Islamic Republic is not impervious to economic countermeasures. The vast majority (80 to 85 percent) of Iran’s export earnings, as well as one half of its budget and a quarter of its gross domestic product, currently derives from energy sales. As a result, over the past two years Iran has reaped a staggering fiscal windfall, amounting to dozens of billions of dollars, from the rising price of world oil. But Iran’s single-sector economy is deeply dependent on foreign direct investment to maintain this output. If they were to be applied consistently and multilaterally, therefore, measures that reduce the foreign capital flowing into Iran’s energy sector have the ability to cause Tehran some serious economic pain.

In particular, Iran is severely susceptible to domestic pressure. Despite massive oil exports (some 2.5 million barrels a day), Iran currently imports a third or more of its refined petroleum products from abroad, at a cost of over $3 billion annually. These imports are not simply surplus; according to some estimates, Iran maintains just 45 days worth of gasoline domestically. Since all politics is ultimately local, this suggests that the inevitable economic squeeze that would accompany an Iranian energy play is likely to reverberate within Iranian society in the form of gasoline shortages and steep price hikes at the pump. And that, in turn, could create major domestic problems for Iran’s ayatollahs.

Perhaps most important, however, is the fact that Iranian interference with the global energy market has the ability to do what the nuclear issue so far has not: crystallize a forceful international consensus against the Islamic Republic. The Bush administration may have thrown its weight behind the creation of a “package” of inducements and penalties designed to bring Iran back to the nuclear negotiating table, but Iran’s ayatollahs know full well that a major energy play on their part is likely to give American calls for more robust measures a much-needed shot in the arm. Simply put, there is no quicker way to turn energy-hungry nations such as China and India into proponents of regime change in Tehran than by turning off the oil tap.

Given these realities, the rhetoric emanating from the Islamic Republic looks more than a little bit like bluster. So far, though, this strategy appears to be succeeding; investor jitters over a looming confrontation with Tehran are directly responsible for the recent spike in crude oil prices—and the attendant chorus of voices warning about the dire consequences of seriously bringing Iran to account.

In their planning, the Bush administration and its international partners would do well to take doomsday predictions about Iranian energy leverage with a grain of salt. But they should also be thinking carefully about the economic and political costs of inaction. Simply put, Washington must ask itself whether the world would be better off with a temporary spike in energy prices created by a serious Iran strategy, or with a permanent hike in the cost of doing business in a region dominated by an atomic Islamic Republic.

- Ilan Berman is vice president for policy at the American Foreign Policy Council in Washington, D.C., and author of Tehran Rising: Iran’s Challenge to the United States.