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.