from Follow the Money

Iran, Nukes, China, Oil, and a few other things

August 9, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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I wonder if Iran's intransigence is any way related to this?

Obviously, the risk of a supply disruption, whether in Saudi Arabia, Iran or Iraq is one reason why oil prices are high.

But I suspect that the causality runs both ways.

Iran has more cash to spend on everything, including on its nuclear program, when oil is high

And with supplies tight, Iran knows that it will have no trouble selling its oil and gas even if it (eventually) goes nuclear, or stops just short.   The fact that oil is fungible commodity works in Iran's favor. If it sells at even a tiny discount, there is an economic incentive to buy the oil even of a state under sanctions.  That is one lesson of Iraq from 1991-2002.

Not to mention that China and India seem to more than willing to do business with Iran even without a discount.

There is not (yet?) consensus to refer Iran's nuclear program to the Security Council, but should that happen, it will be interesting to see how China defines its interests.

A truly effective sanctions regime - at least it seems to me - would have to extend beyond Europe.   The sanction that would really hurt Iran - a global agreement not to buy its oil - is obviously unviable.   The sanctions that are most often discussed (restrictions on Iran's ability to import European goods) are likely to lose force over time as more and more of the goods Iran wants can be produced in China and India.

Not to mention the fact that if Iran's oil exports were unchanged and its imports of European consumer goods and say European aircraft fell, it would - from a balance of payments point of view - have more money to spend buying nuclear components ...

With global oil supplies tight, the economic consequences of taking Iranian oil off the market are completely clear.   Oil is at $60 even with Iran producing all out; that implies that if Iran's production is taken out of the market, prices would go even higher (See Philip Verleger's analysis in this old Ignatius column ).   There are no potential ways to make up 4 million barrels a day, or even 2 million barrels a day.

Who knows, oil might even top $105 a barrel.

And that fact probably limits the United States' (Dick Cheney's ?) options, as does the fact that the US military is rather overstretched right now.   Bush certainly could have taken a harder line today.  Remember, if Rumsfeld is right, the US has more than one reason to be upset with Iran right now.

Update: this Quentin Peel column helps explain the passion that my comments brought forth.
 

Yet the US faces a dilemma throughout the region. There are no nice democracies. Does Washington seek to foment more regime changes, along the lines of the Orange revolution in Ukraine, or the Tulip version in Kyrgyzstan, and risk far greater instability, or does it learn to live with the devils it knows? In both Kazakhstan, on Mr Karimov's northern border, and in Azerbaijan, on the other side of the Caspian Sea, two oil-rich countries have undemocratic rulers trying to resist reform. The US cannot quite decide which side it is on.

Tolerating friendly dictators had its place in the cold war. The habit dies hard. Yet according to an excellent new collection of essays on American exceptionalism*, having double standards is hard-wired into US foreign policy. It is a consequence of the "messianic" tradition of seeking to export American values, such as democracy, while still seeking to pick allies.

It is not just a matter of having double standards for others - such as the willingness to forgive India, Israel and Pakistan for having nuclear weapons while demonising Iran and North Korea. It includes promoting international norms and standards of behaviour that the US is not itself prepared to observe. That is the essence of US exceptionalism. And the trouble is that it undermines the whole campaign to export US values that is at the heart of this Bush administration.



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