The Weapon Iran May Not Want to Use

By Steven Mufson
Washington Post Staff Writer
Friday, May 19, 2006

In 1967, after Israel trounced its Arab neighbors in the Six-Day War, five oil-producing Arab countries used what they called the "oil weapon" and cut off supplies to the United States and its European allies. But the weapon turned out to be a dud. The United States increased its production by a million barrels a day, and more modest boosts by three other oil-producing nations defused the crisis.

Now, as the U.N. Security Council ponders sanctions or other tough measures to punish Iran for developing technology could be used for making nuclear weapons, Iran's president and interior minister have threatened to deploy the oil weapon -- and people are taking it seriously.

Oil traders and others are worried. Many believe that Iran's oil weapon could prove more useful than any nuclear weapon it might develop. Using a nuclear weapon would assure Iran's destruction. Using the oil weapon, by trimming exports to jack up oil prices and holding the world economy hostage, could bring influence, concessions and, if handled adroitly, tens of billions of dollars in extra revenue without any direct military conflict.

European diplomats, eager to avoid testing Iran's willingness to resort to that weapon, have been crafting a package of incentives rather than punishments to convince Iran to give up its uranium enrichment program.

But sources said that senior policymakers within the Bush administration and their French and British counterparts have come to the conclusion that Iran would continue to sell oil abroad even in the face of heightened economic and diplomatic pressure from Western powers. Administration officials have considered and discounted the possibility that Iran would shut in oil supplies, robbing world markets of much-needed crude.

Experts on Iran point to a number of reasons it might be reluctant to cut oil exports. Oil accounts for 85 percent of Iran's exports, according to an International Monetary Fund report issued last month. Revenue from those exports makes up 65 percent of government income. And Iran uses a good chunk of that money to raise public-sector wages and to subsidize its own gasoline prices, one way to keep domestic discontent in check when unemployment is running at more than 12 percent and inflation at 13 percent.

"If you think a little beyond the moment when this happens, the credibility of the country as an economic partner will go down the drain," said Giandomenico Picco, a consultant who was a mediator during the Iran-Iraq war. "The economy as a whole will be affected, not just because of lack of income." Picco said that already some European banks are reluctant to do further business with Iran and that some petrochemical projects might be delayed.

Moreover, the politics of cutting off exports are muddy for Tehran. In recent years, Iran has shifted its oil exports away from the West. It sells substantial amounts to China and India, though U.S. allies such as Japan, Italy and France are still the major buyers. None is sold to the United States because of sanctions dating to the 1979 hostage crisis. All oil is fungible and even selected export cuts will affect market prices regardless of the customer; the symbolism of hurting Japan, China and India to retaliate against sanctions imposed by the United States and its allies would be fuzzy.

So far, Iran's President Mahmoud Ahmadinejad seems to be banking on the oil weapon even as European countries try to avoid testing it. On Wednesday, he rejected a potential European offer of incentives, including a light-water nuclear reactor, to give up uranium enrichment. "Do you think you are dealing with a 4-year-old child to whom you can give walnuts and chocolates and get gold from him?" Ahmadinejad told thousands of people in central Iran.

The reason Iran has any leverage is the change in the world oil balance. As recently as four years ago, the world had 7 million barrels a day of spare oil production capacity, but today that cushion between supply and demand is smaller than Iran's 2.5 million barrels a day of exports. Losing Iran's exports would spell disaster, with soaring prices and limited supplies.

"There is no cushion that is that great," said Edward Morse, executive adviser of Hess Energy Trading Co. in New York. Saudi Arabia's spare capacity could cover 1.2 million to 1.5 million barrels a day of any shortfall, though that would be heavy oil unsuited for many refineries. Morse added, "If there were peace in Iraq or Nigeria, they could produce more. But there isn't peace in either place."

Fear of the oil weapon is "one of the reasons the U.N. Security Council is tiptoeing around this one," said Gary Sick, who dealt with Persian Gulf affairs at the Pentagon and then the National Security Council through most of the 1970s. "I think this is something that's got to be in people's minds and I assume in the minds of folks in Washington. The price of gas is not making them real popular. If they thought about that price going up another $1 a gallon, that has got to be a sobering thought."

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