The Wall Street Journal: In Iran Nuclear Standoff, Scant Leverage for West

EXTRACT: Iran’s oil-output capacity has stagnated for the past decade. Investments, including ones by France’s Total SA, Italy’s ENI SpA and Anglo-Dutch energy giant Royal Dutch Shell PLC, have merely offset natural declines in Iranian fields.

THE ARTICLE

Differing National Interests,
Threat of Global Recession
Leave Few Workable Options
By BHUSHAN BAHREE and MARC CHAMPION
August 21, 2006; Page A3

For all of the tough talk likely in coming days about using global sanctions to shut down Iran’s nuclear-fuel program, the West has few real options for forcing Tehran to back down.

Diplomats in the U.S. and Europe are considering how to pressure the regime should it plow ahead with its nuclear program, as Tehran has signaled it may announce as soon as tomorrow, ahead of an Aug. 31 deadline set by the United Nations. The sanctions being discussed, such as curbs on imports of nuclear-related technology, wouldn’t affect Iran’s overall economy. But the bluntest weapon available short of war — targeting Iran’s vast energy sector — is extremely unlikely to be deployed anytime soon.

The West is in this bind because, despite a shared desire to stop Iran from developing nuclear weapons, a number of forces — the conflicts in Iraq and Lebanon, high oil prices and minimal spare global oil-pumping capacity — have made the world a different place from the 1980s and 1990s, when the U.S. imposed sanctions forbidding its own companies from doing business with Iran.

Several countries that wield vetoes in the U.N. Security Council, the body that would impose any sanctions, have energy companies invested in Iran. China gets substantial amounts of its oil there. That means sanctions such as prohibiting the purchase of Iranian oil or limiting Western investment in that country’s petroleum industry likely would face resistance. In addition, today’s tight oil markets and high prices multiply the risks to the global economy of tripping up the energy sector of a major oil producer like Iran. The country pumps about four million barrels a day, nearly 5% of global output, and exports 2.5 million barrels a day — exceeding Iraq’s entire output.

The picture is further complicated by deep-rooted divisions among the world’s great powers over how to fix the Middle East and by Iran’s ability to strike back at the U.S. and its allies through Shiite militias in Iraq and Lebanon, including Hezbollah.

“Broad economic sanctions, comparable to the isolation of Iraq in the 1990s, are no longer feasible,” Jeffrey J. Schott, a senior fellow at the Institute for International Economics in Washington, told a congressional committee last month. “Many Americans would question harsh measures that might push oil above $100 a barrel and trigger a world recession.”

As a result, diplomats involved in the Iranian nuclear dispute say discussion of sanctions will focus first on starving Iran’s nuclear industry of components and on targeted sanctions against individuals in the regime, such as travel bans.

No mention of oil is made in a menu of potential sanctions that was drawn up as the stick to accompany the June package of U.S.-European incentives for Iran to negotiate closure of its nuclear-fuel program, according to people who have read the text. Western governments believe the program is intended to produce fuel for nuclear weapons, despite Iranian denials.

But the language of the sanctions menu does allow for other “political and economic” measures, an embargo on the “import of specific products” and the prohibition of investment into “certain” Iranian industries — vague enough to leave the door open for sanctions on Iran’s energy sector down the line, these people said.

Set against the risks of targeting Iran’s energy industry is the fear in the West of a nuclear-armed Iranian state whose geopolitical ambitions could endanger the security of the broader oil supply from the Middle East, the world’s major crude-exporting region. U.S. Energy Secretary Samuel Bodman has said curbing Iran’s nuclear ambitions is more important than the price of oil.

Iran has signaled it intends to proceed with its program to enrich uranium, a process that could be used to build nuclear weapons, although Iran says it wants the technology purely for civilian purposes. Iranian officials have indicated they are ready to talk about suspending the program but say they won’t abandon enrichment and won’t suspend it before any negotiations, as the West demands.

Tehran has said it will respond by tomorrow to the package of incentives that the five permanent Security Council members — the U.S., Russia, China, Britain and France — plus Germany offered to negotiate if Iran suspends enrichment first. A U.N. deadline for Iran to cease enrichment expires at the end of this month. Unless Iran complies, the West will very soon have to consider hitting Iran with sanctions.

The debate over wider economic sanctions will be all about Washington persuading others to join it in punishing Iran, because the U.S. long ago banned its oil and other companies from doing business with Iran. That is likely to be a steep climb.

Russia, France and the U.K. have oil companies with interests in Iran. After Japan, China is Iran’s second-biggest oil export market, and Beijing is negotiating a $70 billion deal to develop a natural-gas field, in exchange for imports of Iranian liquefied natural gas.

Iran’s oil-output capacity has stagnated for the past decade. Investments, including ones by France’s Total SA, Italy’s ENI SpA and Anglo-Dutch energy giant Royal Dutch Shell PLC, have merely offset natural declines in Iranian fields.

Export or investment curbs on Iran’s large natural-gas industry are just as unattractive. The European Union is backing plans for construction of a €4.6 billion ($5.9 billion) pipeline across Turkey, in part to tap additional gas supplies from Iran, at a time when European use of gas is outstripping growth in output from its main supplier, Russia.

Iran is vulnerable in one surprising respect: The country imports more than a third of the gasoline it uses, because it lacks enough refineries to turn its own crude into fuel. Thus pinching Iran’s gasoline supplies is theoretically possible.

But energy-industry officials are urging that sanctions steer clear of oil and seek, instead, to deny Iran nuclear components and cause some pain to the Iranian ruling elite through travel bans and asset freezes. Even then, there is a risk. With oil scarce, Iran could strike back at oil consumers by reducing its exports, causing the world economic pain even as it reaped more revenues from higher prices.

In an interview earlier this year, Iranian Oil Minister Kazem Vaziri Hamaneh said that Iran wouldn’t use its exports as a weapon. But since then, other Iranian officials have threatened to play the oil card.

An Iranian foreign-affairs official recently warned that sanctions against Iran could send oil prices to $200 a barrel. Industry officials consider that scenario unlikely, because the U.S. and other major governments have vast stores of oil in strategic inventories that are large enough to offset Iranian exports for about a year and a half. But if Iran held out as the West’s stocks ran down, the situation could change.

Write to Bhushan Bahree at [email protected] and Marc Champion at [email protected]