The Ineptitude on Iran, by Numbers

September 15, 2006 Topic: Economics Region: Persian GulfMiddle East

The Ineptitude on Iran, by Numbers

U.S. sanctions aim to lower Iranian oil and gas revenues. But U.S. Middle East policy has in fact buoyed oil prices, which may have increased Iranian revenues, albeit at lower export levels.

The Bush Administration is now calling for multilateral sanctions on Iran. Sanctions won't succeed in cowing Iran but they will indeed have ominous consequences for the United States and the rest of the world.

On Wednesday at the International Atomic Energy Agency, the administration promoted a swift drafting of punitive sanctions by the UN Security Council against Iran this month. Economic sanctions only achieve their goals in very special circumstances, and Iran does not fit the bill. Washington should rethink its overall policy toward Iran.

The United States has applied a varied mix of economic sanctions on Iran since 1979 in a bid to reverse a host of Tehran's policies and, ultimately, bring about regime change. Clearly, the sanctions have not worked. And while the United States has been busy tightening its screws, average Iranians have become more nationalistic and supportive of the mullahs.

The only discernible result of U.S. sanctions on Iran has been to delay Iran's development of its energy resources. Iran's oil and natural gas reserves equal those of Saudi Arabia. The U.S. has obstructed the development of at least two known large oil fields in Iran (Azadegan and Yadavaran) that together could have proven reserves exceeding 35 billion barrels and produce over 1 million barrels per day of crude at their expected peak; has hindered oil and gas development in the Caspian Sea by playing the countries of the region against each other; has vetoed the construction of Caspian pipelines through Iran (even though they would cost only about half the price of alternative pipelines); and has opposed Iranian gas pipelines to Pakistan and India, even offering India nuclear deals in exchange for not buying Iranian gas.

All these U.S. policies have delayed the availability of Iranian oil and gas supplies by about 1.5 million barrels per day of oil equivalent in today's global energy marketplace and have increased energy prices. Continued impediments to oil and gas development in Iran could reduce Iranian exports by the oil equivalent of over 5 million barrels per day over the next decade.

The U.S. policy is based on the premise that lowering Iranian oil and gas exports would hurt Iranian revenues. But U.S. Middle East policy has in fact buoyed oil prices, which may have increased Iranian revenues, albeit at lower export levels. Economic sanctions have come at a huge cost to the United States. Economics 101 tells us that lower supplies mean higher prices for everyone. The oil market is essentially one global market, although crude types do differ; cleaner fuels, natural gas and natural gas liquids increasingly compete with oil. Because of sanctions the U.S. does not buy Iranian oil and gas but if Iranian energy supplies came to market this would, in turn, afford the U.S. more supplies from other countries and lower prices globally. Equally important, piped Iranian natural gas could in time be destined for Europe, reducing Europe's reliance on Russian gas and the potential for blackmail by Russia. The increased availability of Iranian energy supplies could make an increasing difference to energy prices and security over the next decade.

There have also been political costs. U.S. actions toward Iran have made the average Iranian feel more insecure. Iranians haven't forgotten U.S. support for Iraq during the Iran-Iraq War, nor are they at ease with the presence of U.S. bases in Afghanistan, Iraq, Qatar, Saudi Arabia and in the Central Asian Republics. Ironically, sanctions, higher energy prices and bellicose threats from the United States have bought more time for the mullahs in Teheran, who now have more money and ample reason to fuel nationalistic fervor.

At any rate, the UN Security Council will not vote for even limited sanctions on Iran. China, Russia, or both, will veto such a move. Even if sanctions to freeze all Iranian government assets (about $70 billion) were adopted by the United Nations, Iran could still get by. Iran has had plenty of practice and time to prepare for such situations and has placed assets in places where they cannot be readily identified as Iranian. All sanctions, even comprehensive sanctions, are notoriously porous. In addition, sanctions imposed by a "coalition-of-the-willing" will only become an international embarrassment for the United States, potentially placating a domestic constituency but succeeding in further alienating Iranians and making ongoing U.S. interventions in the region even more difficult and costly. Finally, and most importantly, it is almost certain that Iran would react to any UN or coalition-of-the-willing sanctions by cutting oil exports by at least 50%, driving oil prices to over $100 per barrel with Americans paying close to $5/gallon for gas; a total stoppage of Iranian oil exports (3.2 million barrels per day) would drive oil prices to over $150 per barrel, with Americans paying  $6 to $7/gallon for gas.

There are approximately 1 million barrels per day of global excess capacity today (largely in the Persian Gulf countries) but Saudi Arabia, the United Arab Emirates and Kuwait will think "thrice" before they try to make up any shortfall in Iranian oil exports. And if there is another conflict in the Middle East, Arab rulers could be driven by public sentiment to join Iran in cutting oil exports. Hugo Chavez could lend them a hand too, with even more ominous implications for the global energy market and in turn for the world economy.

There is a viable alternative to imposing more sanctions: stop threatening Iran, especially in public. And America should attempt to understand (not necessarily agree with) the Iranian perspective, minimize U.S. hubris and engage in true dialogue. Iran would be instrumental in allowing the United States to solve most of the problems it faces in the Middle East, including achieving peace and stability in the region, saving U.S. lives and treasure and enhancing global energy supplies.

Hossein Askari  is the Iran Professor of International Business and International Affairs at George Washington University.