Iran's Oil At Heart Of Nuclear Standoff

Iran's oil at heart of nuclear standoff
Experts wonder if Tehran would curtail crude

http://www.chron.com/disp/story.mpl/...s/3956178.html

By DAVID IVANOVICH

WASHINGTON - How far might Iran play its oil card to further its nuclear ambitions?

That question is rattling nerves from Houston to Riyadh to Tokyo.

While negotiations continue between the Western powers and the world's fourth-largest oil exporter over Iran's nuclear program, the energy markets are bracing for a possible showdown.

Analysts worry that a cornered Iran could cut off oil exports to the world or even try to interfere with shipments from neighboring Persian Gulf producers.

"The capacity to create mischief is huge," said Iranian-born Fereidun Fesharaki, a senior fellow at the Honolulu-based East-West Center.

Iranian leader Ayatollah Ali Khamenei hinted at just such a possibility last week, warning Western nations: "If you make any mistake, definitely shipments of energy from this region will be seriously jeopardized."

As long as the markets are jittery, Tehran is sure to receive top dollar for its crude.

Indeed, oil analysts calculate some $15 worth of the price of crude — oil futures closed up $1.28 on Friday in New York at $71.63 a barrel — represents nervousness about Iran.

While still near record highs, oil prices eased last week, partly in reaction to Iran's relatively favorable response to the proposal offered by Western powers to try to encourage Tehran to abandon any effort to produce nuclear weapons.

Iran ships about 2.4 million barrels of oil each day and will earn about $50 billion this year on those exports, noted Julia Nanay, a senior director at Washington-based PFC Energy.

Iranian barrels in demand
Iran's exports satisfy only about 3 percent of the world's thirst for oil. But with demand for crude growing as the economies of China and India expand, those Iranian barrels are much needed.

Iran also borders the critical Strait of Hormuz, one of the world's most important waterways. Tankers loaded with 15 million barrels, or nearly one-fifth of the world's oil supplies, steam through those waters every day.

With the balance of supply and demand in the world oil markets "so precarious . . . even small acts of sabotage or local insurrection can have a significant impact on oil prices," former Federal Reserve Chairman Alan Greenspan told Congress last week.

Analysts are busily working through all the possible scenarios.

Shutting off the spigot, as former Iraqi leader Saddam Hussein repeatedly did, would be a painful decision for Iran. After all, the bulk of the country's export revenue and nearly half of the government's budget comes from oil exports, according to the U.S. Department of Energy's Energy Information Administration.

"If they shut off the flow of oil, pretty quickly their economy would be in shambles," said Daniel Yergin, chairman of Cambridge Energy Research Associates.

The Iranian oil ministry, not wanting to lose customers to competitors, has been stating publicly that it anticipates no interference with oil supplies.

Weighing a confrontation
Yergin suspects if a confrontation develops, Iran might curtail exports but not stop the flow completely.

"It may not be all or nothing," Yergin said. "It may be somewhere in the middle."

Tehran could then hope to recoup some of the revenue that otherwise would be lost from reduced exports, thanks to a higher world price for crude.

Fesharaki, an Iranian energy adviser under the deposed shah, thinks the Iranians will want to continue exporting their own crude.

"Even if there is a limited military attack, limited air bombings, they may still not interfere with the flow of oil," Fesharaki said in a phone interview from Beijing, adding: "There is incentive on the Iranian side just to continue and reap any benefit from the confusion."

Iran, however, has its own military capability. Tehran could, for example, mine the Strait of Hormuz to keep other producers from exporting crude if Iranian exports were shut down.

"They can create interruptions in supply, maybe not long-lasting, but in the short-term they can," Fesharaki said.

Iran already lacks friends in its neighborhood. And if Tehran were to try to block tanker traffic in the strait, "Saudi Arabia would be quite within its rights to consider it an act of war," noted Leo Drollas, chief economist for the Centre for Global Energy Studies in London.

Fesharaki does not think Iran would take such a drastic step unless U.S. forces were to launch an attack.

Japan is Iran's top customer
The United States, which has long had sanctions against Tehran, receives no oil directly from Iran. Japan is Tehran's biggest customer, according to a report by Congress' Joint Economic Committee.

Iran is almost sure to be a major topic of discussion on June 29, when Japanese Prime Minister Junichiro Koizumi travels to Washington for talks with President Bush and then again in July, when leaders of the Group of Eight industrialized nations meet in Russia.

The United States and other industrialized nations have stockpiled about 1.4 billion barrels of oil to cushion the blow from a crisis such as a showdown with Iran.

In theory, those stockpiles would be sufficient to offset the loss of Iranian exports for more than a year and a half.

"On paper, there's no real reason to fret and panic and worry," Drollas said.

The United States alone has 689 million barrels in the Strategic Petroleum Reserve.

"We certainly can handle it for a while," Energy Secretary Samuel Bodman told reporters last week. "If push were to come to shove, there is the Strategic Petroleum Reserve."

Gasoline imports crucial
Western states could ratchet up the pressure on Iran by shutting off gasoline supplies to the country. Despite its vast oil wealth, Iran is the world's second-largest gasoline importer, the report by the Joint Economic Committee noted.

Last year, Iran spent $4 billion buying fuel from elsewhere, according to the U.S. Energy Information Administration.

In part, that's because Iran heavily subsidizes fuel purchases. Iranians pay about 40 cents a gallon for gasoline, a system that encourages wasteful use.

In fact, much of the country's gasoline is smuggled back out of the country, where black marketers can obtain substantially higher prices for the fuel.

But the Iranian government is moving to wean its public off its gas habit. Under this new policy, Iranian consumers will soon be able to purchase only a portion of their fuel needs at the subsidized price. Any fuel purchases above that threshold would cost substantially more.

As a result, Nanay argues that any attempt to block gasoline imports into Iran would be largely ineffectual.

"There will be some social dislocation, and clearly it will cause some problems, but ultimately it gets the government around this issue of out-of-control gasoline use," Nanay said.

War would escalate prices
A war with Iran would almost surely send oil prices soaring, perhaps $10 to $15 a barrel above current levels, Fesharaki said. Other analysts have suggested prices could reach $90 a barrel or higher.

By releasing oil from their emergency stockpiles, industrialized nations could push prices back down again. In fact, Fesharaki argues that if the uncertainty were over, if the markets no longer had to wonder whether the Western powers would attack Iran, oil prices could fall back below $60 a barrel.

Fesharki does not believe the Iranians will really be willing to give up on acquiring nuclear weapons. India, Pakistan and almost certainly Israel have them.

"If you have nuclear technology, you will be taken seriously," Fesharaki said.

Whether the United States ultimately will be able to accept a nuclear-armed Iran remains unclear.