Monday, March 27, 2006

Iran's Oil Weapon

I've blogged in the past about the lack of good options available to the US and the international community in dealing with Iran's nuclear program. Today, however, we have a ray of good news. A commentary in the Christian Science Monitor argues that the "oil weapon" is not as attractive an option for Iran as some assume. Specifically, the article claims that:

For Iran, the use of its own oil as a bargaining chip has limited value. Iran gets 90 percent of its government revenues from oil. Its exports of about 2.5 million b.p.d. amount to 80 percent of its total exports. Oil provides some 40 percent of Iran's gross domestic product.

Yet Iran is the only major producer of oil to suffer from a budget deficit. The Iranian public, notes Alhajji, is heavily dependent on government subsidies for staple goods and fuels. From 1980 to 2005, Iran's population grew by 22.4 million and now stands at 68 million. Its daily oil output during that period rose by only 600,000 barrels.


The blow to the US would not be so severe. Hurricane Katrina shut off 1.5 million b.p.d. from the Gulf of Mexico, but oil prices rose only $10 a barrel. Any Iranian embargo could be countered by more exports from other OPEC nations and tapping the US Strategic Petroleum Reserve.
I don't profess to know that much about the politics of oil, but this illustrates one of the key problems in using economic depedencies as a weapon: the exporter is possibly just as vulnerable as the importer (and vice versa). The US learned this lesson in 1993 when President Clinton tied China' Most Favored Nation status to improvement in China's human rights records. Clinton bet that China would be so unwilling to lose open access to US markets that it would comply. Clinton did not anticipate, however, how much US firms depended on the Chinese market, and under pressure from such companies, as well as the Chinese government, Clinton backed down from his threat.

What all of these means is that the US should, perhaps, be more aggressive in trying to punish the Iranian regime and force it to negotiate on its nuclear program.

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