Iran’s Oil-Weapon Threat Rings Hollow

Max Schulz, The National Review Online:

Does Iran have us over a barrel? As the Iranian nuclear crisis worsens, the mullahs in Tehran are trying to forestall American or Israeli military action by threatening to use the “oil weapon.” Last month Iran’s top nuclear negotiator suggested the country might pull from the world market the 2.5 million barrels of oil it exports daily — a reprise of the Arab oil embargo of the early 1970s. Another possibility Iran has proposed would be to shut down the Strait of Hormuz, the shipping lane through which other nations’ Persian Gulf oil must pass.

The implication is that such actions would set off a depth charge in the international energy economy, so the U.S. and its allies should back down.

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Certainly Iran’s leaders are unhinged enough to try making good on one of those two promises. Either action would send oil soaring, perhaps well over $100 per barrel. Gasoline would spike too, perhaps to $5 or $6 per gallon. The dirty little secret about Iran’s threats, however, is though they might cause some pain, they wouldn’t cripple our economy. The American economic engine is too strong to be brought to its knees by Iran’s machinations, and the weapon Tehran threatens to wield is not as menacing as they would have us believe.

Energy Secretary Samuel Bodman noted recently that the United States could weather a hypothetical Iranian oil disruption and foil Tehran’s efforts at nuclear blackmail. The United States Strategic Petroleum Reserve currently holds upward of 700 million barrels. The Bush administration would not hesitate to release oil from the reserve if Iran closed its taps. That’s the sort of leverage we didn’t have during the 1973 energy crisis.

But the chief reason this is not your father’s oil embargo is that the U.S. economy is much less susceptible to being harmed by an oil shock today than it was during the 1970s. The economy is running at unparalleled strength. It has demonstrated great resilience after taking blows from 9/11, last year’s hurricanes, and the general run-up in energy prices over the last five years brought on by increased demand from China and India. We take the hits, absorb them, and move on with little substantial damage incurred.

Moreover, the economy is less dependent on oil today than during the Arab oil embargo. We truly are moving beyond the petroleum economy. More than 85 percent of the growth in U.S. energy demand in the last quarter century has been met by electricity, most notably in information technology and telecom. Today, nearly three of every five dollars of GDP come from industries and services that run on electricity. In 1950, just one in five dollars of GDP was electric; the remaining 80 percent of the economy was powered by petroleum. Oil is still vitally important to the American economy, of course, but each year it gets a little less so. And each year, we become more insulated from the sort of economic terrorism Tehran is proposing.

While oil prices in excess of $100 per barrel would undoubtedly hurt, particularly at first, the long-term damage would be nowhere as severe as pessimists predict. None of this is to minimize the effect of rising energy prices, which harm consumers and businesses and do have some drag on the economy. But the economic numbers month after month have continued to impress. Clearly skyrocketing petroleum prices so far have not crippled the American economic engine.

At the end of the day, the Iranians probably won’t go the route of pulling their oil from the market, which would hurt Iran more than it would us. Iran depends on oil sales for 90 percent of its export revenues and roughly half of its government’s budget. Halting oil sales would be like the incompetent suicide bomber who blows himself up without getting near his target.

Iran is also unlikely to try to stop shipping in the Strait of Hormuz, as it would likely involve military action against its Islamic neighbors and fellow OPEC members (not to mention tankers bearing China’s flag). Iran’s beef is with the West, not with Saudi Arabia or Kuwait.

How the West handles the growing crisis over Iran’s nuclear-weapons program remains to be seen. However, we shouldn’t take the option of military action off the table just because Iran is rattling sabers against its oil drums. Iran’s threats about its nuclear weapons are one thing, and should be taken seriously. Iran’s threats about its oil weapon, however, ring too hollow to worry about.

— Max Schulz, a senior fellow at the Manhattan Institute, served as a senior policy adviser to U.S. Secretaries of Energy Samuel Bodman and Spencer Abraham.