The west is scrambling for energy resources. Above, a view from Rotterdam port. Photo: Clingendael International Energy Programme
The whole purpose of Iranian sanctions was to try and shift Tehran away from nuclear enrichment by applying intense economic pressures. We now find ourselves in a hydrocarbon crisis of our own making. In an attempt to prove the west could dig deeper than the theocratic regime in Tehran, sanctions were put in place to keep Persian oil away from international markets. The resulting oil price rises were considered “frivolous trivia” compared to the overriding political priority—stopping Iran going nuclear.
Alas, this is clearly no longer the case. Forget any fangled arguments about global economic health—the blunt fact is that the US fell at the first hurdle, when US petrol prices rose to $4 per-gallon—a figure unacceptable to American drivers. Instead of letting market forces play out, the US has bottled it, and is now leaning heavily on the Saudis to soften international oil prices; not to mention openly flaunting the International Energy Agency’s (IEA) strategic reserve to alleviate pressures on US consumers. And now, the US, UK, France and Japan are also discussing tapping into their own strategic reserves.
That might be ‘OK’ for short term American electioneering, but it’s absolutely ruinous for a serious containment policy on Iran. If the US were truly serious about preventing Iranian enrichment, it would be pursuing exactly the opposite policies. Prices would be allowed to rise; the IEA would keep reserves firmly under lock and key; and most importantly, the Saudis would be persuaded to withhold oil from global markets, and especially from China and India, to force Asian consumers to sever all Iranian hydrocarbon ties. Until Asian-Persian oil links are cut, Iran will find it very easy to keep counting down the nuclear clock.
Yet none of these policy options are in play, precisely because international priorities have come full circle on Iran. Nuclear containment by curbing Persian petroleum production is out—Washington is increasingly happy to let China and India keep sourcing the bulk of 3.3 million barrels per day (mb/d) of Iranian crude, all in the interest of keeping US oil prices at politically tolerable levels. If anything “homeland economic security” through quick fix measures for cheaper oil, has become Washington’s top priority. Increasing Saudi production is one approach they’re trying; IEA stock releases will be another.
Western policymakers therefore need to ask themselves a serious question: what on earth are they doing regarding Iran? Half-baked sanctions are merely leaving them with the worst of both worlds; high oil prices on the back of heightened Middle East risk, without any serious pressures being brought to bear on Tehran. Worse still, they risk blowing the Saudis’ tenuous cover as the supposed linchpin of the oil world, able to increase (or reduce) production at will. The long-term credibility of the IEA will also suffer when reserves are inevitably released for political gain, rather than using it for its intended purpose—to fill actual supply gaps.
What actually sits beneath this policy mess is a rather more inconvenient truth to ponder: we simply aren’t in an economic position to play tough with Iran. The US foolishly fell for its own energy independence press, convinced it was immune to the global realities of oil markets. The myth of energy independence has been fuelled by new production and enhanced reserves across the Americas. This straight-line logic glibly assumes that price pressures from the Middle East wouldn’t affect consumers at US pumps. Not so.
Back in the real world, beyond US imaginations, global output is stuck at 91mb/d production, and struggling to reach a 100mb/d “comfort zone.” Until there is more slack in the global energy system, Iran’s long term enrichment ambitions will be offset against short-term Western vulnerabilities to high oil prices. And for now, Iran is holding all the aces.
Logic therefore dictates that we have two options. The first is to step up our sanctions game in Iran—take the economic heat from a well-enforced policy, and force Asian consumers (via Saudi pressures) to sever Persian oil supplies. That’s the only way progress can be made on nuclear talks. The second is to walk away. Accept that we can’t follow through on our economic threats, let oil markets settle, and hope that supply cushions can be built up with a view to applying further economic pressure to Iran in future. What we categorically don’t have is a notional “third way” between the two. Sadly, this muddling-through approach is exactly what we’re going to get—all the way to US Presidential polling day in November 2012. Until the US can clear its decks for a policy rethink, it remains pincered between speaking tough on Iran, while actually pursuing its baseline policy objective: cheaper oil for US voters. The result will be extreme oil market volatility; Iran will continue down its nuclear path; US geo-economic credibility will suffer as it falls between these two policy stalls—especially because Tehran can make Washington squirm all the way to Election Day.
Matthew Hulbert is Senior Research Fellow at Clingendael International Energy Programme
The whole purpose of Iranian sanctions was to try and shift Tehran away from nuclear enrichment by applying intense economic pressures. We now find ourselves in a hydrocarbon crisis of our own making. In an attempt to prove the west could dig deeper than the theocratic regime in Tehran, sanctions were put in place to keep Persian oil away from international markets. The resulting oil price rises were considered “frivolous trivia” compared to the overriding political priority—stopping Iran going nuclear.
Alas, this is clearly no longer the case. Forget any fangled arguments about global economic health—the blunt fact is that the US fell at the first hurdle, when US petrol prices rose to $4 per-gallon—a figure unacceptable to American drivers. Instead of letting market forces play out, the US has bottled it, and is now leaning heavily on the Saudis to soften international oil prices; not to mention openly flaunting the International Energy Agency’s (IEA) strategic reserve to alleviate pressures on US consumers. And now, the US, UK, France and Japan are also discussing tapping into their own strategic reserves.
That might be ‘OK’ for short term American electioneering, but it’s absolutely ruinous for a serious containment policy on Iran. If the US were truly serious about preventing Iranian enrichment, it would be pursuing exactly the opposite policies. Prices would be allowed to rise; the IEA would keep reserves firmly under lock and key; and most importantly, the Saudis would be persuaded to withhold oil from global markets, and especially from China and India, to force Asian consumers to sever all Iranian hydrocarbon ties. Until Asian-Persian oil links are cut, Iran will find it very easy to keep counting down the nuclear clock.
Yet none of these policy options are in play, precisely because international priorities have come full circle on Iran. Nuclear containment by curbing Persian petroleum production is out—Washington is increasingly happy to let China and India keep sourcing the bulk of 3.3 million barrels per day (mb/d) of Iranian crude, all in the interest of keeping US oil prices at politically tolerable levels. If anything “homeland economic security” through quick fix measures for cheaper oil, has become Washington’s top priority. Increasing Saudi production is one approach they’re trying; IEA stock releases will be another.
Western policymakers therefore need to ask themselves a serious question: what on earth are they doing regarding Iran? Half-baked sanctions are merely leaving them with the worst of both worlds; high oil prices on the back of heightened Middle East risk, without any serious pressures being brought to bear on Tehran. Worse still, they risk blowing the Saudis’ tenuous cover as the supposed linchpin of the oil world, able to increase (or reduce) production at will. The long-term credibility of the IEA will also suffer when reserves are inevitably released for political gain, rather than using it for its intended purpose—to fill actual supply gaps.
What actually sits beneath this policy mess is a rather more inconvenient truth to ponder: we simply aren’t in an economic position to play tough with Iran. The US foolishly fell for its own energy independence press, convinced it was immune to the global realities of oil markets. The myth of energy independence has been fuelled by new production and enhanced reserves across the Americas. This straight-line logic glibly assumes that price pressures from the Middle East wouldn’t affect consumers at US pumps. Not so.
Back in the real world, beyond US imaginations, global output is stuck at 91mb/d production, and struggling to reach a 100mb/d “comfort zone.” Until there is more slack in the global energy system, Iran’s long term enrichment ambitions will be offset against short-term Western vulnerabilities to high oil prices. And for now, Iran is holding all the aces.
Logic therefore dictates that we have two options. The first is to step up our sanctions game in Iran—take the economic heat from a well-enforced policy, and force Asian consumers (via Saudi pressures) to sever Persian oil supplies. That’s the only way progress can be made on nuclear talks. The second is to walk away. Accept that we can’t follow through on our economic threats, let oil markets settle, and hope that supply cushions can be built up with a view to applying further economic pressure to Iran in future. What we categorically don’t have is a notional “third way” between the two. Sadly, this muddling-through approach is exactly what we’re going to get—all the way to US Presidential polling day in November 2012. Until the US can clear its decks for a policy rethink, it remains pincered between speaking tough on Iran, while actually pursuing its baseline policy objective: cheaper oil for US voters. The result will be extreme oil market volatility; Iran will continue down its nuclear path; US geo-economic credibility will suffer as it falls between these two policy stalls—especially because Tehran can make Washington squirm all the way to Election Day.
Matthew Hulbert is Senior Research Fellow at Clingendael International Energy Programme
