Use of the Energy Weapon to Avert War

The sounds of saber rattling have been growing louder by the day in the Persian Gulf. While Israel has recently performed an impressive exercise over the Mediterranean, Iran proceeded last week to test its long-range missiles. The region has been preparing for a while for a likely war and negotiations are at a standstill. Since the international sanctions on Iran have not had the desired effect, it now maybe high time to use the only weapon that can avert a war: energy.

At first sight, a country (Iran) which has the second gas and oil reserves in the world should not be so worried about the international community focusing on energy sanctions. But two important facts about Iran's economy prove that specific sanctions against Iran's energy sector could be the clincher to solve the current standoff.

First, 85 percent of Iran's revenue come from oil. Second, Iran imports most of its consumption of refined products, like gasoline. In fact, Iran consumes a half million barrels of petroleum products per day, of which 40 percent is imported, at a cost of $4 billion to $5 billion per year. Also, the fact that in the past few years, the consumption of petroleum products has increased by 10 percent per annum is putting added pressure on the oil sector.

Iranian authorities are very much aware of their vulnerabilities. In September 2006, the foreign affairs and defense commission of the Majlis, the Iranian parliament, prepared a report that concluded that sanctions on the oil sector would have a great impact on the stability of the country.

Considering in particular the scenario of an international export ban of refined petroleum products to Iran, coupled with an embargo on the 2.5 million barrels per day (3 percent of world consumption) that Iran exports, the report envisioned Iran plunging in a deep economic and social hole that could jeopardize the regime.

When it comes to natural gas, the West has been more active in boycotting Iran. The latest example is the announcement on July 10 by Christophe de Margerie, CEO of French oil and gas conglomerate Total, that his company will not invest in the huge South Pars project. Margerie explained his decision telling the Financial Times: ” Today we would be taking too much political risk to invest in Iran, because people will say: 'Total will do anything for money'.”

Most likely Margerie has given in to pressure from the French government that has been recently quite forceful on Iran. Total actually followed suit to two other large European multinationals (Royal Dutch Shell and Repsol) that decided in May to bail out of the same project. Total's decision is a big setback for Iran that was counting on large foreign investments to help reach its goal to become within 10 years the third largest gas producer in the world.

Tehran is still unsure what to do with its natural gas: use it for domestic consumption, since Iran had to import some this past winter; inject it in oilfields; or to export it. Whatever the case, and even if Tehran is saying that the Russian oil company Gazprom or Chinese or Indian companies are going to step in, Iran is in a tough spot. In fact, none of these companies including Gazprom have the expertise to develop and exploit South Pars. Furthermore and contrary to common wisdom, Russia and Iran are actually competitors in terms of energy, especially with regard to the European and Asian market. And Gazprom will not be happy to see Iranian gas starting to flow toward Europe and eating up its market share.

Time is of the essence in this matter and while the U.S. Treasury campaign to pressure banks to stop doing business with Iran has been quite successful, it has not been enough to have a strong immediate effect on the Tehran regime. That is why the oil sanctions route must be followed now as a last resort to avert a military escalation. Wouldn't it be ironic that one of the oil-richest countries in the world be pressured by using the oil weapon?