Posted by: bmeverett | June 2, 2011

Dealing with Iran


Reuel Marc Gerecht and Mark Dubowitz ran an interesting piece in the May 31 Wall Street Journal entitled “The Case for an Iranian-Oil-Free Zone.” The authors propose a new approach to Iranian sanctions based on requiring all oil-based products entering the US to certify that no Iranian oil was used in their manufacture. The idea is to make it difficult and costly to use Iranian oil, thereby reducing the value of Iranian oil on the market and cutting the amount of cash Tehran has available to cause mischief. Interesting and provocative, but it wouldn’t work. Here’s why.

Oil-based products are fully fungible. In other words, it’s almost impossible to distinguish the sources of one gallon of gasoline or one pound of plastic from another. A system to track Iranian oil to its ultimate source is simply impossible.

According to the Energy Information Administration, in 2010 Iran produced about 4.3 million barrels per day (MBD). Iran itself, however, consumed about 1.7 MBD, so its net exports are only 2.5 MBD or less than 3% of the world total of 87 MBD. We know that about half this oil goes to Western Europe and Japan. A significant amount goes to China, but we don’t have a complete picture of where all the Iranian oil ends up.

The Gerecht/Dubowitz proposal would certainly annoy the daylights out of our closest allies and discourage law-abiding companies from doing business in the US by drowning them in paperwork. The Chinese, however, are a different story. China is still the counterfeiting capital of the world. Do we think the Chinese wouldn’t lie to us? History also tells us that rebranding petroleum and petroleum products is a pretty easy business. There are lots of unscrupulous oil traders who have experience from the Iraqi oil-for-food system who are both willing and able to disguise Iranian oil. How in the world would the US monitor and enforce such a system? Likely result: unhappy allies and laughing mullahs.

In reality, the US has three choices regarding Iran’s nuclear program. The first is to accept Iranian nuclear weapons as fait accompli. This outcome is far and away the most likely, despite successive US administrations insisting that Iranian nucs are unacceptable. On balance, if you can’t (or won’t) stop something, it’s better to say nothing than to pound the table and claim you won’t stand for it. Posturing has some domestic political appeal, since it makes the President appear tough and gives the illusion of doing something. That illusion can be bolstered, at least for a while, by going to the UN and agreeing on symbolic actions, such as limiting the travel of senior members of the offending regime. In Washington-speak, such steps are called “crippling sanctions”. To ordinary English speakers, they are “mild inconveniences”. History tells us that rogue states never respond to such gestures, even when accompanied by the not particularly credible threat of more severe steps to come. The UN passed 18 resolutions demanding that Saddam Hussein comply with their inspections regime. He never believed them.

After a while, it becomes clear that symbolic actions won’t work, but they’re not without cost. The “sanctions” the US and the UN have imposed on Iran make us look weak, indecisive and timid. Hundreds of millions of people in the Middle East and elsewhere are watching to see whether Iran can successfully defy the US. So far, the answer is yes. The search for effective, cost-free solutions is futile, and cleverness is not the answer.

The second US option is military force, a most unlikely step, particularly for the current administration. The main problem with military action is that it is likely to set back, but not destroy Iran’s nuclear program. We may not know the locations of all the relevant facilities, and airstrikes may not destroy all the targets. People will die, and the US will be subject to massive criticism. Although many governments in Europe and the Middle East would be privately happy with such a US response, their public posture would be outrage. In previous times, the US might have been willing to accept the political firestorm in return for enhanced national security, but no longer. President Obama wants to be revered not scorned around the world.

The US does, in fact, have a third option. Instead of trying to prevent other countries from buying Iranian crude oil, we could prohibit the Iranians from selling any oil. All of Iran’s crude exports are loaded at a handful of terminals at the northern end of the Arabian Gulf. The Kharg Island terminal, with a capacity of 5 MBD, accounts for most of the exports. Loaded tankers must then pass through the narrow Straits of Hormuz to reach the open ocean. To stop Iranian oil exports, the US would not have to attack Kharg Island or any of the oil tankers originating there. We would not have to take on the Iranian military in its own waters. Instead, we could take the following steps: (1) recognize an Iranian Government in Exile (GIE), (2) ask a US court to find that Iranian oil is the rightful property of the GIE and not the mullahs, (3) declare that the US Navy will seize cargoes of Iranian oil on the high seas to be returned to their rightful owner and (4) warn that the US Navy will sink any oil tanker that refuses to be boarded and seized.

Iran does not own any oil tankers. Purchasers of Iranian oil must charter ships on the private market to deliver the product to its final destination. Following the US declaration, no ship-owner would allow his ships to load Iranian crude, and no insurer would offer coverage. Iran would be out of the oil export business without a shot being fired. Granted, Iran could smuggle a little oil out by road or barge, but not very much. No oil, no money. No money, no nukes and perhaps no mullahs either.

This approach has some obvious downsides. First of all, a blockade is an act of war, but so is a military strike. In fact, by the Pentagon’s own definitions, cyber-attacks, such as the one launched against Iran’s nuclear facilities last year, is also an act of war. The world would scream at us, but probably no more than would happen in the case of air strikes. Second, the sudden removal of 2.5 MBD of oil from the market would cause prices to skyrocket with an immediate detrimental effect on the economic recovery in the US and our allies. This plan would work and work quickly. The issue is whether we are willing to follow JFK’s inaugural pledge to “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty”. If not, better get ready to accept the unacceptable.

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Responses

  1. Bruce – Excellent piece. Having been closely tied to the Middle East since the late 1940s I agree. I consulted for the Iranian Consortium in the late 1960s and gained a lot of knowledge about the culture and politics of Iran. I have always felt that all we needed to do to rid them of the mullahs was to give the people support. Instead for 50 years we have talked and talked and done nothing.
    We could have stopped gasoline shipments to Iran, since they had very litttle refining capacity. They have been increasing that capacity over the pst several years and this would likely no longer work. This one act is about all the support the people would have needed.
    Now, the mullahs still hold the lives of millions in their hands. Yes, your idea has risks, but there are no risks under the alternative. Too bad that politiicans and diplomats fail to listen to businessmen who have been THERE. Howard


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