January 16, 2006
THE HIGH PRICE OF SANCTIONS
The West (a.k.a. energy consumers) has a choice. An ugly choice, but a choice nonetheless: Iran without nuclear weapons, or cheap oil--cheap here defined as something approximating ~$60 (if you can call that cheap).
Rest assured, the label will fit if oil's at, say, $100 a barrel. In any case, the West (along with China, Japan and other dependents on imported oil) can't eat their energy cake laced with geopolitically friendly frosting and have it too. Or so it seems, as news of Tehran's tenacity on its nuclear program continues to invade, harass and otherwise threaten the outlook on matters of war and peace, energy and security.
The five permanent members of the United Nations Security Council--the U.S., Britain, France, China and Russia--are discussing the matter as we write. Whether they will vote to impose sanctions on Iran is still up in the air. But the fact that we've come this far suggests how precarious the new Iranian crisis has become.
For those who've managed to stay clueless on the pressing geopolitical crisis du jour, here's the update: Iran insists on developing nuclear power plants, which it insists is all about peaceful energy development. The U.S., Europe and the powers that be in Asia are skeptical, in varying degrees, thinking that ulterior motives may be applicable too. There's even more variation in current thinking on what, if anything, to do about it. But we digress.
Officially, the glitch arises by way of the Nuclear Non-Proliferation Treaty. Iran is effectively dismissing the document these days, despite the fact that the theocracy in 2003 signed the protocol with the U.N.'s International Atomic Energy Agency. Part and parcel of the agreement was the suspension of Iran's nuclear energy research and development. All of which apparently has been resumed after Iran removed IAEA seals on enrichment-related equipment and material.
Mohamed ElBaradei, director-general of the U.N.'s International Atomic Energy Agency (IAEA), tells Newsweek in the January 23rd issue that "if [Iran has] the nuclear material and they have a parallel weaponization program along the way, they are really not very far—a few months—from a weapon. We need to revisit the treaty, because that margin of security is unacceptable."
How's that for stakes? And just to keep things interesting, let's throw in a hefty supply chunk of the world's most valuable commodity as potentially at risk for an extra twist.
Fears that Iran is moving ahead with nuclear research intended for more than peaceful energy development has brought the world closer to yet another energy crisis. Indeed, the U.N. Security Council may vote to impose sanctions on Iran as a penalty for breaching the Nuclear Non-Proliferation Treaty. In which case, Tehran seems intent on responding, perhaps in increments, perhaps in one fell swoop. In any case, rest assured that if pressed Iran will ultimately react by wielding the biggest stick at its disposal in any argument with the West: oil.
How do we know that? Because Iran's economy minister, Davoud Danesh-Jafari, announced as much to the world yesterday. "Any possible sanctions from the West could possibly, by disturbing Iran's political and economic situation, raise oil prices beyond levels the West expects," he told Iranian state radio, via The Mail & Guardian.
Lest anyone underestimate the potential for trouble, Sen. John McCain laid out the stakes yesterday on CBS' "Face the Nation" program, via CNN.com: "This is the most grave situation that we have faced since the end of the Cold War, absent the whole war on terror." The Republican senator also advised: "If we're going to put an economic stranglehold on Iran, which we should be doing -- it's preferable to military, any military option, and maybe more effective -- we need the Russians and Chinese....If the price of oil has to go up, then that's a consequence we would have to suffer."
What's the risk that the tangled affair with Iran will deteriorate into a decline, if not a collapse in oil exports from the land of the mullahs? Something higher than zero. Only time will decipher the outcome, of course. In the meantime, there are intervening steps, at which points a unique and new set of risk dynamics must be assessed. The first approaching challenge resides with Security Council, and therefore the question: Will they vote to impose sanctions? If so, Iran will undoubtedly be provoked.
Iran, for its part, seems unyielding. As reported by the country's government-run news organization, the Islamic Republic News Agency, there's precious little room for debate if only because Tehran speaks in tones that sound less than encouraging for compromise. "Iran has the inalienable and legal right to access nuclear technology and produce nuclear energy under the nuclear Non-Proliferation Treaty (NPT) and with the supervision of International Atomic Energy Agency (IAEA) inspectors," Ahmad Moussavi, Iran's vice president for legal and parliamentary affairs, said yesterday.
The U.N., via the IAEA, begs to differ. The question before the global economy: Does the U.N. Security Council beg to differ too? To press the point, will the Security Council vote to impose sanctions on Iran?
There's reason to wonder, if only because China, a U.N. Security Council member, has signed major energy deals with Iran in recent years and so the Middle Kingdom may find reason to pull back from imposing sanctions on its new energy sugar daddy, and thereby vetoing any effort to teach Iran a lesson.
In fact, the U.S. knows all too well the energy-related incentives for playing softball. Iran holds some 10% of the world's proven oil reserves, and is second only to Saudi Arabia within Opec in pumping crude oil, according to the Energy Information Administration. Most of Iran's production is exported; its primary customers are Japan, China, South Korea, Taiwan, and Europe. That's not to say that the import-dependent U.S. would be off the hook if an Iranian-induced oil spike arrives. Oil is a fungible commodity, and so higher prices there invariably result in here prices here.
For the moment, however, this is all an academic exercise, to be debated in the Security Council. Mr. Market, of course, may or may not be inclined to wait for a definitive answer from the geopolitical high ground for assessing a reasonable price going forward, adjusted for any and all glitches. All eyes will be on oil traders (again) when trading resumes tomorrow.
Posted by jp at January 16, 2006 10:42 AM
Why is it when people discuss the ramifications of any actions the U.S. or the UN might take against Iran, they seem to forget we have a 140,000+ troops in a unstable neighbor and that the hard-liners in Iran hold significant sway over the largest, and likely ruling, faction there? A faction that, up to now, has at mostly supported us and whose cooperation is essential in getting our troops out of there safely. And they also border Afghanistan. Both borders are completely porous.
Bush has massively overplayed his hand. His hard line with Iran is so obviously a complete bluff. The invasion of Iraq is playing out as one of the greatest policy blunders of all time. The cost in American lives might not rival Vietnam, but the immediate and long term consequences are likely to be much greater.
Posted by: wondering.... at January 21, 2006 8:28 AM
To round out Jacob Singer's post, here's the link to the text of the Treaty on the Non-Proliferation of Nuclear Weapons. After digesting it all, inquiring minds may wonder: why does the UN Security Council, which includes Iran's "friends" Russia and China, collectively feel inclined to go down the path, so far, of confrontation rather than accommodation? Is this really all just a case of misreading Article IV? Or might there be more to the story than merely Article IV?
Perhaps this is a good point to quote IAEA Director General Mohamed ElBaradei, who, according to a recent IAEA press release, "expressed his serious concern about Iran´s decision to unravel the suspension of enrichment-related activities requested by the IAEA Board of Governors before the Agency has clarified the nature of Iran´s nuclear programme. He recalled that, although the Agency has been investigating Iran´s nuclear programme for three years, a number of important issues relevant to the scope and nature of Iran´s programme remain outstanding due to the less than full and prompt transparency on the part of Iran."
Posted by: Jim Picerno at January 18, 2006 9:59 AM
I am depressed at seeing the level of knowledge about the Proliferation Treaty.
1. The NPT article IV gives Iran the right to nuclear research and civil nuclear development - including enrichment. If you don't believe, just read the Treaty.
2. The 2003 Accords are a moratorium on nuclear research that Iran signed on a voluntary, expressedly temporary and one-sided basis.
3. Thus, don't try to sneak around the cake by inventing our "legal" right that Iran should stop research and/or enrichment. Just outrightly say that we don't like it and that we are willing to let the stronger rule the world.
4. Just read.
Posted by: Jacob Singer at January 18, 2006 9:21 AM
The citizens of Iran will be really keen on losing their only significant source of foreign exchange.
They already have billions in cash sloshing around in their bank accounts. A few months -- maybe even a year! -- without more won't kill them.
Posted by: Rob McMillin at January 18, 2006 1:29 AM
I doubt the security council will take any action. China has invested in Iranian oil and has not shown in the past to be worried about nuclear proliferation. Russia will also probably side with Iran.
The Iranian president says he thinks Israel should be destroyed. I've read the Iranian leader thinks the Muslim messiah will come soon and he thinks he can make it happen sooner...
I think either Israel and/or the US will attack or they'll wait to see what Iran does when they get some nukes. Short term OK, long term very bad.
Posted by: M Cooper at January 17, 2006 1:42 PM
Iran wants to continue developing its nuclear program. The Security Council wants it to stop. Enforcing the latter will take some degree of enforcement, which can include sanctions and military options. Either way, unless one side backs down, the prospect of creating turmoil and uncertainty in one of the world's largest oil-exporting nations seems likely to raise oil prices.
Also, keep in mind that Iran's gov't doesn't necssarily reflect the will of its people on this matter.
Posted by: Jim Picerno at January 17, 2006 6:28 AM
I'm not sure how it follows that a dis(nuclear)armed Iran will drive up oil prices. What, exactly are they going to do with their oil if they don't sell it into the world market?
The citizens of Iran will be really keen on losing their only significant source of foreign exchange.
Posted by: Nordic at January 16, 2006 11:16 PM
Unfortunately we will see the continueing disfunctionality of the U.N. Security Council manifest itself by the triumph of Political self-interest over nuclear proliferation. (i.e. the China veto)
Posted by: Brian Wilson at January 16, 2006 3:14 PM
Yes, Russia can be expected to balk, although it's unlikely to be for reasons associated with oil prices. A surge in crude prices will be of no small help to Russia's economy, since the country is the second-largest exporter after Saudi Arabia. China, by contrast, is a large and growing importer.
As for the Security Council, it moves on its own timetable, which is to say, they can bring up any topic for vote at any time. Whether the motion is pressing at any given moment, or passes, is another question, and one inextricably linked to big-power politics.
Posted by: Jim Picerno at January 16, 2006 1:52 PM
I would think Russia as well as China will balk at sanctions. Do you know how long the UN security council can be expected to deliberate before deciding not to act?
Posted by: quintsquarry at January 16, 2006 12:55 PM