Advancing a Free Society

The Market Value of Iranian Threats

Monday, January 30, 2012

It’s a banner week for Iran: opportunities abound for its rulers to demand international attention and, perhaps, distract Iranians from repeating their 2009 dissent against a government and ruling elite that has served Iranians poorly.  Campaigning has begun for Parliamentary elections that will be held in early March.  Inspectors from the International Atomic Energy Agency recommence their review of Iran’s nuclear programs.  The Iranian Parliament is considering a law that would immediately cut off oil exports to the European Union in retaliation for EU sanctions.  Secretary Panetta said he believes Iran could have a nuclear weapon within a year, and the ability to attack our homeland with it in two to three years.

While Iran supplies a significant amount of oil to EU countries (as high as 13% of total crude for Italy and Spain), oil is even more important to the fortunes of Iran: 65% of government revenues result from selling oil. Iran’s threat to retaliate against the European Union by halting oil exports this week fell flat.  The price of benchmark crude was completely unaffected by Iran’s threat.  In fact, it fell below $100 a barrel.  Which means one of two things: either markets disbelieve Iran would turn their spigots off, or markets have a high degree of confidence other suppliers will fill any shortfalls Iran causes.

The European Union’s willingness to accept significant economic dislocation at a time of weak economies has sent a powerful signal into Iran about the acceptability to “the West” of the Iranian government’s choices.  Not only has Saudi Arabia offered to source any supply shortfalls caused by Iran, they have agreed to do so at current market prices.

This is a welcome development in an otherwise very difficult problem.  Markets, aided by major oil producers like Saudi Arabia, have taken away one of the few aces Iran holds.  And it comes immediately after Iran attempted to upset markets with the threat of closing the Straits of Hormuz, through which 20% of the world’s oil is shipped.  Iran’s threat to close the Straits was also not believed, attributable to a combination of political leaders not acting alarmed and our military providing operational reminders of its dominance.

The argument against attacking Iran’s nuclear infrastructure hinges on the widespread belief that Iranians would “rally ‘round the flag” and we would succeed in delaying their nuclear program only at the cost of uniting Iranians in support of their government and enraging the “Arab street.”  While we should be circumspect of how little we actually know of what Iranians think, there are indications Iranians question the value to them of their government’s dedication to its nuclear programs.  Moreover, Iran’s Arab neighbors are intensely concerned, some even advocating U.S. attacks on the nuclear infrastructure.  At a time when those governments are under democratizing pressure at home, they would not likely advocate such positions if they believed there would be a domestic backlash.

If Iran cannot cripple the economies of countries concerned by its nuclear programs, what sway can it expect to have?  Thankfully, very little.

(photo credit: ezioman)