Author:
Howard Roger Topics: Economics / Politics
01.02.2007
(extract from the book published by I.B. Tauris Publishers)
Introduction
Like an individual who suffers sudden and unexpected misfortune, great powers
can decline and fall with a rapid, even dramatic speed. Although the influence
and prestige of many great empires has seeped away gradually and imperceptibly
over many decades, or even centuries, in the way that
was true of the British Empire or what Edward Gibbon called the ‘slow decay’[1] of the Roman, the sudden demise of others can sometimes elicit as much
surprise among contemporaries as the historian. Such a startling transformation
eventuates most obviously after military defeat, of the sort that befell
ancient Persia, or as a result of political turmoil and revolution, similar in
scale to the upheavals that brought a tumultuous end to tsarist Russia. At the
present moment it seems possible that the United States could suffer a serious
loss of global influence with a comparable rapidity. The same country that on
the eve of the invasion of Iraq in March 2003 appeared to be an untrammelled
colossus, confident of its ability to stride with ease through the Middle East
and elsewhere, prompting admiration among its friends and allies in equal
proportion to the hostility and contempt it provoked among its rivals and
enemies, could in the next few years conceivably look defensive and vulnerable,
with the loyalties of its long-standing allies increasingly uncertain, its
former allies even more distant and its enemies ever more emboldened. At the
same time, the predictions of those who had heralded
‘the next American century’, and looked forward with joyous anticipation to the peace, democracy and
progress it would supposedly bring, might equally look hollow and premature.
Should it come about, the single most important factor in engineering this
change of fortune will not be America
’s experiences in Iraq, where its name, reputation and resources have been
undermined by insurgency, civilian casualty and atrocity. The USA, after all,
survived defeat in Vietnam and maintained its global pre-eminence despite the
war
’s serious damage to every party. Nor will it be simply because of the fiery rise
of the Chinese dragon, whose raw economic power is currently on course to make
it the world
’s biggest marketplace and knock the United States into second place. Even if
this happens, America can still remain a global superpower, if not a superpower
quite as pre-eminent as before. Instead, much more important is the world
’s economic dependence on oil and natural gas, and the degree to which political
power has suddenly begun to move into the hands of those who do possess the
resources to feed that dependency at the expense of those who do not.
Of course this presents a clear irony. Throughout the twentieth century, the
governments of the developed nations were frequently accused of exploiting the
resources of the less developed, and alleged to be using their overwhelming
military superiority to plunder and take advantage. Nationalist leaders such as
Mohammed Mossadeq in Iran and Gamal Abdul Nasser in Egypt played this card to
great effect before seizing with resolute hand the Western-owned oil
enterprises, the Anglo-Iranian and Suez Canal companies, that had long enjoyed
lucrative local concessions. Similar accusations were ventured by those who
argued that the US invasion of Iraq in March 2003 was essentially motivated by
an interest in its vast deposits of high quality oil. But in the course of the
present century, a clear change of emphasis has quickly come about, as the
leaders of Europe and America openly accuse their counterparts in energy-rich
states of exploiting their oil and gas deposits to devastating political
effect. As US Vice-President Dick Cheney claimed in a telling phrase in May
2006, the Russians are using their energy resources as
‘tools of intimidation or blackmail’.[2]
A glance at the wider geopolitical picture in 2006 illustrates the degree to
which political power is in the process of rapidly migrating to the hands of
those countries that do possess deposits of oil and gas.
In January, Moscow had briefly cut off supplies of gas to the Ukraine amid a
price dispute, and four months later, as its giant energy supplier Gazprom
considered making a bid for Centrica, the Western European utility company,
Russian premier Vladimir Putin warned that his country would simply switch its
energy supplies to Asia if Western governments blocked the expansion plans of
Gazprom and any other Russian energy groups. With an overwhelming dependency on
imported oil, one that has for some time caused deep consternation within the
highest offices,[3] the United States can only listen to such demands with a
mixture of envy and alarm.
On the other side of the world, in Venezuela, President Hugo Chavez has been
voicing a stridently anti-American rhetoric and has pursued policies
deliberately antagonistic to Washington, with a vehemence that has been fuelled
by the rise in the price of oil. When first elected as president in 1998, at a
time when a barrel fetched a mere $12 on the world
’s market, Chavez had neither the spare cash nor the political influence to
antagonize Washington. But ever since the price subsequently began to spiral,
the Venezuelan leader has been a moving force of regional anti-Americanism,
furnishing Castro
’s cash-strapped Cuba with some 90,000 barrels of oil a day and funding leftwing
political parties throughout Latin America.[4] While many of those who listen
may be lukewarm towards, or disagree strongly with, his anti-Washington line,
the threat of retaliation by such a key regional oil exporter does not always
give them much room for choice. And although Chavez continues to export more
than half of his oil to the USA while speaking in such vituperative terms about
his best customer, both he and the Americans know that, in the event of any
clash, Venezuelan oil would find new markets much more readily than Washington
would ever find new suppliers.
Besides allowing governments that produce petroleum to openly defy Washington,
the world scarcity of oil also undermines American global power in another way.
For, given a choice between respecting American interests and wishes on the one
hand, and securing a source of energy supplies on the other, foreign
governments are being increasingly tempted to prioritize their energy concerns.
One stark illustration of this prioritization came in September 2004, when
Beijing abstained from a US-sponsored UN resolution condemning the genocide in
Sudan, and instead promised to block moves to enforce an oil embargo on a
country that was a major oil exporter to China. This was no easy option for the
Chinese government, which was anxious not to tarnish its international image by
being seen to pass easy excuse for a Sudanese regime that was complicit in
mass-scale atrocities against innocent civilians.
Lying at the heart of the new petropolitics is an imbalance between the supply
of and demand for refined oil. Although there have been numerous occasions when
a similar imbalance has wreaked serious economic havoc
— during the OPEC oil embargo on 1973, for example, or in the early days of the
Iran-Iraq War in 1980
— the present situation is differentiated by the dramatic, prolonged and
seemingly inexhaustible economic growth of China and, to a lesser extent,
India. Since 1993, when it was last self-sufficient in oil, China
’s GDP has trebled and its demand for oil has almost doubled, thereby creating a ‘demand shock’ with far-reaching political and economic tremors. While China’s overall share of the world’s oil market is a relatively meagre 8 per cent, its economic expansion has
accounted for nearly a third of global growth in demand since 2000.
Of course it is impossible to tell if the price of oil will continue to remain
so high in the years ahead, before alternative forms of energy become
available: predicting the energy market is notoriously difficult. But the
International Energy Agency, the oil sector monitoring body, expects global
demand to more than double by 2030, with many of the world
’s current producers, notably Saudi Arabia, facing real hurdles if they are to
maintain, let alone increase, current levels of supply.[5] And even a semblance
of such a market imbalance cannot fail to have major political repercussions,
putting more power and influence into the hands of those countries that possess
natural resources of oil and natural gas at the expense of the rest.
It is in this big picture of the new petropolitics of the twenty-first century
that Iran
’s challenge to the United States forms part. The rise in the price of oil has
been profoundly important, for example, in creating the newly found nuclear
defiance of Iran, one of the world
’s leading oil exporters. In October 2003 Iranian negotiators had suddenly and
unexpectedly caved in to international pressure by granting extra powers to the
inspectors of the International Atomic Energy Agency and by immediately halting
uranium enrichment. But just two years later the same regime was willing to
openly defy the threat of referral to the United Nations, its subsequent
deadlines and the passage of condemnatory resolutions. The key difference was
not the election as premier of the hot-headed Mahmoud Ahmadinejad, who came to
power in the summer of 2005, but the rise in the price of oil from a relatively
meagre $33 per barrel in early 2004 to a peak of $70 in August the following
year. Not only did this make the passage of meaningful sanctions impossible but
it also gave Tehran scope to threaten retaliation against its critics while
rewarding those countries, notably China, that took its side. Hence the brazen
defiance of the president, who in a typical statement openly declared, the day
before a UN deadline to stop sensitive nuclear work expired at the end of April
2006, that his country would
‘not bow to injustice and pressure ‘.
Iran’s vast resources of oil and natural gas have not only emboldened the Tehran
regime but also put increasing strains on America
’s international influence. Washington’s attempts to isolate Iran from foreign investment and build a united front with
which to confront its nuclear ambitions are made considerably more difficult by
the lure of these resources. Confronted by a growing domestic demand for oil
and gas that they cannot readily ignore, numerous countries throughout the
world have greater reason than ever before to sidestep or even openly defy
Washington
’s wishes and instead prioritize their links with Tehran. The result is a growing
tension between the US and its international allies and rivals, and with
non-aligned countries, a tension that is posing a clear challenge to American
political power.
As the conclusion of this book argues, however, these tensions do not render
inevitable any negative impact on the global influence of America. Far from it;
in international affairs, just as in an individual
’s everyday life, there is very rarely such a thing as inevitability. There are
only a series of choices, which can be taken with varying degrees of ease and
difficulty. In this particular case, the question of how far Washington can
adapt its political position in order to meet the petropolitical challenge from
Iran, is ultimately reducible to one of the American mindset, for the choices
that confront those who pull the strings of political power are made difficult
essentially because they are obstructed by certain psychological barriers, such
as the difficulty of doing business with a
‘terrorist regime’. It is this psychological barrier, not Iranian oil, that ultimately presents
the challenge to America.
CHAPTER ONE
WHY IRAN’S NATURAL RESOURCES MATTER
From the dramatic moment in the early hours of 26 May 1908 when a British
geologist, George Reynolds, was suddenly woken in his tent by earth tremors and
the sound of something violently bursting through the ground outside, Iran
’s oil has always been an intensely political commodity. For in the years that
followed their discovery at this remote wilderness spot known as
Mas-jid-i-Suleiman, these enormous oil reserves were a prize of immense value
over which numerous participants played desperate political games and fought
often vicious military battles, typically sparing no expense in their
determination to take possession or to keep rivals at bay. Great explorers of
the British Empire, cunning Bolshevik agents, ruthless Nazi spies, theatrical
Iranian nationalist martyrs and bitter Cold War rivals
— all of these different types, some of them dark and sinister, others romantic
and charming, have their place in the rich and fascinating story of Persian
oil.[1]
Today, almost exactly a century after their discovery, Iran’s superb natural resources of oil and gas are also standing firmly on the stage
of world politics. But this is not so much because the outside world is
fighting tooth and nail to win control over them, in the way that it once was,
but because the possession of such supreme natural wealth is now allowing the
Tehran regime to pose a subtle challenge to the global political influence
exerted by the United States. This challenge may not as yet stand centre-stage
— on the contrary it has hitherto played its part largely unnoticed by its
audience
— but it is one that is nonetheless growing fast in stature and, unless there is
some dramatic and unexpected political transformation in either Tehran or
Washington, it seems destined to soon assume a starring role.
This is of course a very different type of ‘threat’ from the one that the Tehran regime is usually supposed to present both to
America and the wider outside world, for in an age in which visions of nuclear
catastrophe and terrorist violence loom large, contemporary Iran cannot fail to
conjure up some very disturbing images. In American eyes, above all, Iran has
long been viewed as
‘the world’s primary sponsor of terror’, while its nuclear programme, ostensibly for the production only of civilian
energy, is invariably regarded as disguising a secret bid for a warhead that
could target not just the densely populated cities of southern Europe and
Israel but also the Saudi oil fields and their Gulf transit routes on which the
American and the wider global economy so strongly depend.
Yet Iran’s challenge to the United States is not born of any military threat. Nor can it
in any way be labelled as
‘terrorist’, whatever that elusive term really means. Iran instead poses a challenge to
American interests that is less readily measured and, to those accustomed to
viewing
‘threats’ only in more traditional terms, one that is more easily overlooked than any
military menace of the sort that the United States faced in the Cold War and
continues to face from the Al Qaeda terrorist network.
This contemporary challenge to the United States is instead a consequence of a
political leverage that essentially hinges on the world
’s increasing need for the very resources that Iran possesses in such abundance.
Their ownership inevitably bestows a degree of power and influence that exists
in equal proportion to the need that others have for them, and this means that
one country
’s possession of oil inevitably has powerful political repercussions in the same
way that the possession of any highly valued commodity, like brains or beauty,
also confers power and influence on its beholder.
Of course no oil or gas-rich country poses a political threat to another simply
because it possesses such an enormity of natural resources: Saudi Arabia, to
take one obvious example, has had a very strong diplomatic relationship with
Washington since 1943, when President Roosevelt, declaring that
‘the defence of Saudi Arabia is vital to the defence of the United States’, extended a helping hand of large American aid to Riyadh.[2] Instead, Iran’s contemporary political challenge to the United States represents a convergence
of two influences, one born of its possession of immense natural wealth, the
other a result of nearly three decades of enmity, mistrust and outright
hostility to the world
’s greatest superpower. And it is from the interrelationship between these
political conditions and material resources that this challenge to the United
States arises.
There are three distinct ways in which this convergence is undermining US power.
On the one hand, it is putting increasing strain on America
’s relationship with many of its allies across the world, notably the European
Union, Japan and Pakistan. For while all of these countries share America
’s great and growing need for Iran’s oil and gas, no ally of Washington — with the exception of Israel — harbours any comparable strength of hostility towards the Iranians, and all
therefore feel much more at liberty to trade with a regime that the Americans
refuse to deal with. The result is that these countries are being increasingly
tempted to build and cement ties with Iran that Washington does not share and
which it has also desperately wanted to stop others from having.
While undermining Washington’s ties with its allies, Iran is also creating stronger political links with
American rivals such as China and Russia, and with a country, India, that is
formally
‘non-aligned’.[3] In the case of China and India, these links reflect the particularly
important role that Iranian oil and gas is playing in feeding their rapid
economic growth: Beijing
’s relatively new commercial and political relationship with Tehran, for example,
one that is still only in its relative infancy, has been created and sustained
by an insatiable Chinese thirst for oil that its domestic production has failed
to quench since the early to mid-1990s. In the case of Russia, which is a net
exporter of oil and gas, Iran
’s natural resources are important in another, more indirect, way because they
create highly lucrative business opportunities that Russian enterprise is
extremely keen to exploit, opportunities that are born both of Iran
’s need to develop its outdated energy infrastructure as well as the demand that
has sometimes been created by the vast earnings generated by the international
sale of oil and gas.
In each case, Iranian natural resources are undermining not just American power
and influence over this
‘international community’ but also over the Tehran regime itself. For, without the wider support of other
countries, America speaks with a lone voice that is much less easily heard and
listened to than a louder chorus. What is more, there are also a number of
other ways in which the status and power of the Tehran regime
— America’s chief rival and enemy in the Middle East since the deposition of Saddam
Hussein in 2003
— has been bolstered by the export of vast quantities of oil and gas. For the
sale of these commodities has secured huge earnings that have allowed the
regime to purchase political support with a series of populist measures, to
expand the size and strength of its security apparatus and to pursue a vastly
expensive nuclear programme that would be quite unsustainable, or even
unthinkable, without them. So in these wider terms Iran
’s oil and gas are also presenting Washington with a clear challenge.
Of course the process by which Iran’s energy resources are undermining American global power is far from linear but
is instead highly sensitive to fluctuations in the temperature of the world
’s wider political climate. In the latter months of 2005 and in early 2006, for
example, the global political pendulum was pushed subtly and inadvertently away
from Tehran by the aggressive rhetoric of Iran
’s new hardline president, Mahmoud Ahmadinejad, whose highly charged speech
before the United Nations General Assembly in September 2005 and fiery talk
about
‘wiping Israel off the map’ confirmed all the worst fears of those who claimed that his election, three
months before, spelt unmistakable trouble for the outside world. As a senior US
official in Washington put it, such radical posturing meant that, for the
moment at least, countries that had previously been prepared to side with Iran
were now
‘running for the doors’ because ‘nobody wants to be associated with someone that outlandish’.[4] As some international investors took fright and the Tehran Stock Exchange
collapsed, these words looked far from exaggerated. Yet although an abrupt and
sometimes broken course it may be, it is a process that is nonetheless
unmistakably unfolding.
The Iranians are fully aware of the political fissures that they can use their
natural resources to exploit, and adequate testimony to this awareness is their
tactic of linking the rewards and penalties yielded by their energy resources
with the outside world
’s cooperation on the hot political issues of the day. So it is probably no
coincidence that the Iranian authorities have suddenly and unexpectedly
announced the discovery
— or supposed discovery — of new oil and gas fields, and the availability of new contracts to develop
them, just as international negotiations on the nuclear issue have reached
important junctures. So on 26 August 2002, just days after the world had been
shocked by the exposure of a covert uranium enrichment programme, the Iranian
Oil Minister, Bijan Namdar Zanganeh, held a press conference and announced that
at least 50 billion barrels of new oil reserves had been found in Iran in the
course of the preceding four and a half years. And when in the following year
controversy over the issue flared up again, as Iranian officials denied weapons
inspectors access to one of their suspected nuclear facilities, the director of
Iran
’s Oil Development and Engineering Company (ODEC) on 14 July suddenly announced,
without citing evidence, the discovery of another new reserve, not far from the
Iranian Persian Gulf port of Bushehr, whose estimated 38 billion barrel
deposits promised to make it the world
’s second biggest oil field after Saudi Arabia’s Ghawar development. More was to come, for in March 2005, as the Iranians tried
to extract as many concessions as they could from European negotiators in
return for surrendering their nuclear ambitions, Zanganeh announced that new
oil and gas fields had been discovered in the southern province of Khuzestan
and south of the South Pars gas field in Bushehr province, with an estimated
capacity of 5,700 million barrels of oil.
It is with these ‘petropolitics’, the politics of Iran’s energy, that this book is concerned. But before looking at each of the
different ways in which American powerand influence is being undermined, this
opening chapter now seeks to look in more detail at the background to the
Iranian challenge that represents a convergence between two exceptional, if not
unique, factors. One of these, it has been mentioned above, is its possession
of outstanding natural resources that are of increasing value to the outside
world. The other is the existence of a very considerable degree of animosity
between the Tehran regime and the country that currently wields more political
influence and power than any other
— the United States. It is the interaction of these two exceptional influences
that has given birth to a unique challenge to American hegemony, one that is
already in its early stages of infancy and growing up fast.
IRAN’S NATURAL RESOURCES
One of the two roots from which Iran’s challenge to American global hegemony stems is its possession of outstanding
natural resources. Its proven[5] oil reserves are undoubtedly vast and widely
estimated to hold at least 95 billion barrels, meaning that they are outsized
only by those of Saudi Arabia, whose deposits are estimated to contain 260
billion barrels, by Canada
’s 170 billion barrels, and perhaps by Iraq’s, which are thought to contain around 115 billion. Moreover the size of Iran’s underlying reserves, or ‘oil-in-place’, like those of many other countries, may well be considerably greater, since
most experts feel sure that there are many more undiscovered deposits,
particularly in Caspian waters. Its massive new oil field at Azadegan in the
southwestern province of Khuzestan, for example, one which alone has the
potential to provide a very large consumer like Japan with more than 6 per cent
of its annual oil imports, was discovered only in 1999, while two important
onshore oil fields near Gavaneh, which are thought to have combined reserves of
over 100 million barrels, were also located in the same year. This means that
Iran
’s hopes of increasing its production capacity to as much as 7 million barrels
each day (b/d) by the year 2024 may also be assisted by the discovery of even
more deposits, just as the announcement in July 2003 of the discovery near
Bushehr also prompted a sharp upward revision of estimates of its reserves.
Of course no one knows exactly how big Iran’s resources really are, or how much of those reserves are recoverable: ‘oil data is [always] like paint thrown across a canvas — you get the broad outline of the situation, but even then the paint later moves
of its own accord
’, as one analyst has put it.[6] In the autumn of 2003, some independent analysts
were highly sceptical of Iranian claims about the size of the Bushehr field,
which pushed the size of Iran
’s national reserves up from 95 to 130.8 billion barrels, putting it ahead of
Iraq. So although this figure has been accepted by some highly respected
sources,[7] a leading Honolulu-based consultancy claimed that the Iranians had
double-counted existing reserves and assumed a recovery rate that was well
above the average figure for the Middle East. Instead, Iran
’s self-assessment, the analysts concluded, was really just a bid to convince
OPEC that Iran should continue with a high export quota that Iraq
’s newly founded freedoms might imperil.[8] Put bluntly, they were cheating in
the same way that they have sometimes made announcements about their oil
industry at curiously convenient times, almost as if to provide international
governments with carrots that can win them support just when Tehran most needs
it.[9]
Yet no one disputes that Iran has huge potential as a major player in the future
oil industry, and while in recent years Iranian wells have certainly been
producing oil at a sharp rate
— between 3.5 and 4.2 million barrels every day, which amounts to around 4 per
cent of global production
— most analysts reckon that, with sufficient investment, they have the potential
to increase such capacity considerably. Even if, in the years ahead, the
Iranians fail to inject the investment necessary to recover a higher proportion
of their underlying reserves
— Iran’s recovery rate, which stands at around 24 per cent of their overall national
reserves, is much lower than the Middle Eastern average of 32 per cent
— then their oil is still important for another very simple reason: there would
be an overall global shortfall if its supply was ever seriously disrupted, a
shortfall that would cause the price of oil to increase dramatically and affect
every country in the world, whether directly importing Iranian oil or not.
Besides oil, Iran also holds vast deposits of another commodity that has immense
and rapidly increasing value to the outside world
— natural gas. Because Iran’s natural gas reserves are reckoned to total something around 940 trillion cubic
feet (cf), second in size only to those in Russia, it clearly has huge
potential as a key exporter of natural gas. Its current production, of only
around 2.7 trillion cf each year, will also be considerably boosted if yet more
important reserves are discovered, as most independent experts expect: Tabnak,
a super-giant gas field containing 15.7 trillion cf of gas and 240 million
barrels of condensate, was found only in April 2000, and as recently as June
2004 the Iranian news agency announced that two new natural gas fields had been
discovered at Balal and Lavan Island in the Persian Gulf.
One of the great jewels in Iran’s energy crown is the massive gas field at South Pars in the Persian Gulf whose
reserves, which are really just an extension of Qatar
’s North Field, amount to somewhere between 280 and 500 trillion cf. Such is the
size of this single field that the Iranians are having to develop it in a
series of distinct phases, which are in the course of being offered to national
and international bidders. Nor are there just a handful of these individual
‘phases’, for although the Iranian parliament has given the Oil Ministry authorization
to go ahead with 1 8 phases in the development of this giant gas field, the Oil
Minister has previously said that 28 different phases, maybe more, could
eventually be required. Whatever its capacity may ultimately prove to be, the
Iranians undoubtedly have immense ambitions for the field and have declared
that they want the Pars Special Econo-Energy Zone, established in 1998, to
become
‘one of the most important industrial energy centres of the Middle East’.
Once again though, these figures, like those of the country’s oil reserves, have to be viewed with a highly sceptical eye because it is
likely that they have sometimes reflected ulterior motives, such as an effort
to lure outside investment or the interest of the outside world when Tehran has
needed it. In 2005, for example, another report by the FACTS independent
consultancy [10] argued that South Pars might really be considerably overrated:
‘most foreign companies with hands-on experience in South Pars believe the
capability to be 13 -15 billion cubic feet per day (cfd). [But] Iranian field
engineers estimate the field to be more productive, based on the results of the
first three phases and believe the upper limit to be 20 billion cfd.
’ The enormous difference between these two estimates could conceivably be
explained by deliberate Iranian distortion, although it will remain a
distortion of academic importance until the field
’s production has reached a lot more than it has at present.
Of course the importance of Iran’s superb natural resources cannot be assessed just in terms of either their raw
size or the relative ease with which they can be extracted. Just as important
is their accessibility to foreign markets, and on this count Iran certainly
scores very high marks. Some of its most important potential customers include
the states of the Middle East, notably Dubai, which has in recent years
experienced a particularly urgent need to import gas, as well as Kuwait, Abu
Dhabi, Oman and Bahrain, whose own needs are growing rapidly. Iran has already
made some preliminary agreements to supply some of these Middle Eastern
countries: on 1 2 January 2003 initial deals were signed in Tehran by the
Kuwaiti Foreign Minister, Sheikh al-Ahmad, for the eventual implementation of a
plan to import around 300 million cf of Iranian lean gas into Kuwait every day
along a 200km underwater pipeline, while on 1 5 March 2005 the Iranian Oil
Minister, Zanganeh, and the Omani Energy Minister, Mohammed al-Rumhy, signed an
agreement to supply the kingdom with 350 billion cf of Iranian gas every year,
a quantity to be eventually increased to 800 billion cf each year by 2012.
Of course Iran is not alone in eyeing this Middle Eastern market, and Qatar in
particular is a major rival. But Iran is geographically much better positioned
than Qatar to serve some other potential markets, notably Turkey and the former
Soviet Union, through which pipelines can move Iranian oil and gas to much
wider European and Asiatic destinations. Moreover Iran also has two
sophisticated deep-water ports and refinery facilities, at Asaluyeh and Kish
Island, from which tankers can channel its oil or liquefied natural gas (LNG)
to even remoter destinations, such as South Korea and coastal China. So far
some important steps have been made towards linking Iran with these wider
markets. In September 2004 Alikhan Malikov, the head of the Azeri Gas Company,
announced that Iran would soon start supplying up to 12 billion cf of gas every
year to the autonomous republic of Nakhichevan in Azerbaijan, while six months
before the National Iran Gas Exporting Company (NIGEC) agreed to annually
deliver 12.6 billion cf of natural gas over the next 20 years along a proposed
$220 million pipeline to Armenia in return for receiving supplies of electric
power from a state-run plant in Yerevan. One of the main customers, however, is
Turkey, which in 1996 agreed to purchase Iranian natural gas over a 22-year
period, starting in 1999. In practice, of course, things have not turned out to
be as easy as everyone originally hoped, and a series of technical and
political problems brought years of delay until 2002, when Iran and Turkey
officially inaugurated a natural gas pipeline running between Tabriz and
Ankara, along which 106 billion cf of Iranian gas is eventually expected to
move each year. Although there have subsequently been persistent disagreements
between the two countries on the price and quality of Iranian gas, the opening
of this pipeline has put a much wider European market within Iran
’s grasp: on 13 March 2002 the Greek state gas company Depa signed a $300 million
deal with NIOC to extend the Tabriz-Ankara link into northern Greece, from
where it could be fed into the rest of Europe, while in January 2004 a joint
Austrian-Iranian venture was initiated to extend the new pipeline, whenever it
was completed, into southern Austria. If the Iranians decide to make a
commitment to feed it, then this
‘Nabucco’ pipeline could move between 720 and 900 billion cf to Austria each year.
At the same time plans to feed the vast and rapidly growing markets of India and
Pakistan have also been slowly fomenting. In February 2002 Tehran and Islamabad
initiated a feasibility study to assess the prospects for a 1,600-mile, $4
billion pipeline that would cross southern Pakistan to supply India with
Iranian natural gas, providing Islamabad with lucrative transit fees as well as
its own gas supply in the process. For many months political tensions between
India and Pakistan over the status of the disputed region of Kashmir seemed to
make this project a mere chimera, particularly when, in the summer of 2002, the
two countries appeared to be on the verge of full-scale nuclear war. Yet by
mid-2005, as a thaw in relations between the two countries seemed to have
melted a considerable amount of the 58-year ice that had hitherto made such a
plan unthinkable, the Iran-New Delhi pipeline looked to be a very real
prospect. And it certainly seemed to be much more realistic than another
proposed solution to the region
’s energy needs — a pipeline that would move Turkmen gas across remote and lawless regions of
Afghanistan, which would not only be very difficult to build but would be
highly vulnerable to military attacks and acts of sabotage. By the spring of
2006, as the outside world closed ranks before Iran
’s unexpected nuclear confrontationalism, the Iranian-Pakistan section of the
pipeline looked ready to proceed, even if the final leg, between Pakistan and
New Delhi, looked far from certain.
Of course there are numerous other factors besides the size and accessibility of
such resources, which one way or another may influence Iran
’s future as an oil and gas exporter. Above all its potential as a leading player
in the regional gas market may eventually prove to be more limited than that of
other countries, notably Qatar, because there is at present much stronger
domestic opposition to the export of natural gas. Led by Dr Saeidi, the former
head of the NIOC Reservoir Engineering Department, this body of opinion argues
that Iran
’s own reserves are needed to meet growing domestic demand and should be injected
back into the country
’s oil fields to boost their production. This uncertainty is compounded by the
fact that no one is sure how much gas will in future be required for this
re-injection to boost oil supply: the government estimates that 5 billion cfd
will be needed for this purpose during the 2005-9 Five-Year Plan, a much lower
figure than the 20 billion cfd cited by those who oppose gas exports. The
Iranians,
’ as one leading authority, Professor Jonathan Stern, emphasizes, ‘have not realized the export potential of their gas resources over the past 30
years. Whether they will choose to do so and succeed in doing so over the next
30 years, remains to be seen.
’ [11]
Whatever its growth potential may eventually prove to be, it is clear that such
an exceptional natural wealth does not in itself create any political challenge
to the hegemony of the United States, which has of course often had very strong
and successful relations with numerous regimes that are just as wealthy as Iran
and, in many cases, have human rights records that are at least as dubious. For
example, other oil- and gas-rich countries like Russia and Venezuela have in
recent years also grown in political confidence but have not provoked a
comparable American reaction, just as Washington
’s relations with Riyadh have remained strong. What lies behind Iran’s challenge to American global hegemony is rather an interplay between Tehran’s massive natural wealth and the intense hostility and mistrust that have
characterized US-Iranian relations since the Islamic revolution of 1979.
Viewed in these terms, it is obvious where a tension might lie. Such wealth in
the hands of one
’s enemy inevitably provides economic muscle, financial earnings and a political
bargaining power that can hold some sway over one
’s own allies, feed your rivals and buttress the enemy regime. Iran’s contemporary challenge to the United States, in short, represents an explosive
tension between politics and resources.
THE US-IRANIAN POLITICAL FRAMEWORK
For the United States, the immensity of Iran’s natural resources is of no benefit, or rather of no direct, immediate benefit
because, since 1995, there have been no economic ties of significance between
the two countries and since 1980 no formal diplomatic relations either. In the
eyes of many ordinary Americans and certainly for a very considerable number of
highly influential US policymakers, the Iranian regime is simply a
terrorist-supporting, human-rights oppressing, nuclear-arming and even
evil-embodying political order with which Washington should not and cannot
deal, unless a massive change of policy, rhetoric and attitude comes about in
Tehran.
The background to such antagonism is well known. Until the attacks on the World
Trade Center 22 years later, there have in the post-war era been few images
more traumatic for the American public than those that emerged from Iran during
and in the immediate aftermath of the Islamic revolution of February 1979, when
Shah Mohammed Reza Pahlavi
’s monarchical order was swept away by the violent demonstrations of millions of
street protestors. Having strongly supported the royalist regime for years, and
having offered the dying Shah a place of temporary refuge after he fled his
homeland, the United States soon became a target for the revolutionary
hotheads, and on 4 November, nine months after the revolution began, several
hundred young Iranian students overran the US embassy in Tehran. The pictures
of what followed shocked and horrified the American public, which watched
footage of some of the blindfolded diplomats and soldiers, 66 of whom were held
as hostage, being led around the embassy compound by their mocking captors.
If these images were not bad enough, worse was to follow when in April 1980
President Carter
’s bid to rescue the hostages by force, Operation Eagle Claw, backfired badly.
The mission, designed to fly special forces personnel into Iran, attack the
embassy, rescue the hostages and fly them out of the country, got off to a
disastrous start when three of the helicopters encountered severe and
unexpected weather conditions in the Iranian desert which forced the commander
on the spot to cancel the operation. But as the Americans pulled away from
their base, 200 miles south of Tehran, one of the helicopters collided with a
transport plane, killing eight American servicemen in a giant fireball that lit
up the night sky and which, in its enormity, was visible from hundreds of miles
distant. America
’s sense of humiliation, not long after the end of the Vietnam War, was of course
overwhelming and compounded by even more shocking images that emerged from
Iran, this time of revolutionary zealots gleefully pointing to the charred
remains of the unfortunate Americans killed in the aborted operation
Over the decade that followed, Iran’s image in the eyes of most Americans, and indeed most Europeans, as a brutal,
fanatical and violent regime was reinforced by quite a few other incidents.
During the eight-year Iran- Iraq War, which began in September 1980, stories
emerged of very young Iranian soldiers, perhaps no older than 12 or 13,
voluntarily undertaking suicide missions against the Iraqi army, although to
most members of the general public much better-known cases were the American
allegations, never conclusively proven, that Tehran had instigated the 1982
car-bombing of a US compound in Beirut in which 241 marines died. But the
Iranians undoubtedly did have links of some kind with the Beirut kidnappers who
seized high-profile figures such as Terry Waite and John McCarthy, and who in
1984 tortured and killed the local CIA chief, William Buckley. Nor did the
regime appear to have lost much of its fervour and fanaticism when, a decade
after the revolution, a death sentence was pronounced against the British
writer Salman Rushdie for the publication of his allegedly blasphemous work The
Satanic Verses, or, for that matter, when Iranian Kurdish leaders were gunned
down in a Berlin restaurant by regime assassins in 1992.
Yet this background does not in itself explain either the divide between Iran
and the United States or the depth of animosity and mistrust that we see today.
Although the 444-day US embassy siege had prompted both the immediate rupture
of diplomatic relations between the two countries, which were formally broken
off on 7 April 1980, as well as the cessation of trade with Iran, this economic
impasse had began to break down significantly by the early 1990s. So while
Ronald Reagan
’s Executive Order 1 2613, signed on 29 October 1987, had imposed a new import
embargo on goods that originated from Iran, it did not technically prevent the
overseas subsidiaries of American companies from importing them into the United
States or stop US-based companies from exporting these Iranian goods to other
foreign markets elsewhere in the world. Such loopholes meant that by the
mid-1990s US companies were buying and exporting very large quantities of
Iranian oil: throughout 1994, for example, Iran exported a daily output of 2.6
million barrels, 23 per cent of which was moved by American companies such as
Exxon, which was contracted to buy 250,000-300,000 barrels each day, Coastal
(130,000), Bay Oil (70,000) and Caltex (60,000). By 1995, two years into the
Clinton presidency, this trade had grown substantially as American businesses
continued to find and exploit legal loopholes that had by now allowed the
United States to become Iran
’s third largest trading partner and its sixth largest export market.
It was also at this time, in March 1995, that Washington had a major opportunity
to patch up relations with Tehran, or at least to establish some kind of
relations. The opportunity came when Iranian premier Hashemi Raf-sanjani
offered an American company, Conoco, a lucrative $1.6 billion contract to
develop two of its offshore oil fields that did not require prior US government
approval because the deal involved only its Dutch affiliate, Conoco Iran NV.
This was a dramatic gesture by Tehran, one that stunned Washington because it
would have opened a gateway to a much wider economic relationship and, by
extension, a window of opportunity through which political and diplomatic
dialogue could be started.
US SANCTIONS AGAINST IRAN
Although business leaders proclaimed the Rafsanjani offer as a golden
opportunity for both countries, the deal was soon scuppered in Washington, but
not because anyone of influence harboured traumatic memories of the days of
revolution, or because they remembered the fate of Buckley or the threats
against Rushdie. Though these perhaps influenced the image of Iran in the
public mind, it was the
‘high politics’ on Capitol Hill, where so much foreign policy was determined, that now
mattered. Claiming that Iran was directly implicated in many of the violent
attacks on Israeli targets in the Middle East by groups such as Hamas and
Islamic Jihad, Senator Alfonse D
’Amato (Rep-NY) had already introduced draft legislation into Congress that
sought to impose a blanket ban on all American trade, including deals struck by
the overseas subsidiaries of US companies. Two months later, as Rafsanjani made
his offer to Conoco, D
’Amato found strong support from the Israeli government, which pressed Clinton to
impose the trade ban on the grounds that, unless such pressure was exerted on
Tehran, premier Yitzhak Rabin could not
‘take risks for peace’ in the ongoing negotiations to find a lasting Middle East settlement.
The Rafsanjani offer had brought matters to a head and led to Washington
decisively turning a cold shoulder. Echoing D
’Amato’s claim that ‘all trade with Iran must stop so we don’t provide terrorists with hard currency’, President Clinton argued that ‘there are times when important economic interests must give way to even more
important security interests, and this is one of those times
’. On 1 5 March, barely a week after the offer was made to Conoco, Clinton signed
a new Executive Order, number 1 2957, prohibiting all oil development deals
with Iran, and on 6 May, as he declared a state of emergency with Iran, issued
Order [12] 95912 which effectively imposed a blanket ban on all commercial and
financial transactions with Iran. This more-or-less outright prohibition on
Iranian imports was complemented by similarly sweeping restrictions on
exporting US goods to Iran.
There are at present some minor exceptions to this outright prohibition,
exceptions that allow particular items of value and interest such as carpets
and caviar to be imported,[13] and the export of humanitarian goods and
services, which found their way into the country in the aftermath of the
massive earthquake that devastated the Bam region of southern Iran in December
2003. Although on 17 March 2000 President Clinton
’s Secretary of State, Madeleine Albright, did announce a slight easing of
sanctions, these regulations have nonetheless remained substantially unchanged
since they were introduced, having been renewed by President George W. Bush in
March 2006, who argued that
‘because the actions and policies of the government of Iran continue to pose an
unusual and extraordinary threat to the national security, foreign policy, and
economy of the United States, the national emergency declared on March 15,
1995, must continue in effect beyond March 15, 2006’.
The US authorities vigorously enforce these sanctions and the various other laws
that supplement them. In 2002, for example, the Houston-based oil-field
services company BS
& B Process Systems was fined almost $1 million by the US Department of Commerce
for illegally exporting oil-field equipment to Iran, after a lengthy
investigation by the Department
’s Bureau of Export Administration (BXA) revealed that the company had made the
sales to Iran in April 1996 for a sum that was far less than the fines imposed.
The BXA brought its case not under the 1995 sanctions legislation but under a
more general foreign export policy that calls for the prevention of exports of
any equipment to any listed country which
‘could make a significant contribution to that country’s military potential or could enhance its ability to support acts of
international terrorism
’. Other companies have also fallen foul of similar prosecutions, such as Pars
Company Inc of North Carolina which was fined $10,000 in September 2001 for
exporting gas monitors to Iran without a Department of Commerce licence.[14]
SECONDARY SANCTIONS
But what makes the scope of US sanctions highly unusual is their applicability
to foreign nationals wanting to do business with Iran. Washington has at times
passed and enforced comparable legislation against other countries but does so
only very rarely in order to avoid the fierce political battles that are likely
to ensue. In the 1980s, for example, attempts by the Reagan administration to
prevent international companies from supplying Russia
’s trans-Siberian pipeline project proved to be immensely controversial, while
from 1996 the introduction of the Helms-Burton bill for secondary sanctions
against Cuba had led to litigation in international courts
— a complaint was lodged before the World Trade Organization in 1997 against a US
law that blocked investments in Cuba
— and had eventually forced Washington to strike a compromise with the European
Union. Yet such obstacles did not prevent a determined number of Congressmen
from pushing their case forward and in the summer of 1996, only a year after
first proposing new sanctions against Iran, Senator D
’Amato put forward a new bill that called for secondary sanctions on any ‘extra-territorial’ investment in Iran’s oil and gas sectors that exceeded $40 (later $20) million. Under this
legislation, the US president has the discretion to impose up to two of six
possible sanctions on any company that falls foul of its terms. These include a
ban on its imports of goods and services into the United States, a federal
government ban on the purchase of its goods and services, the imposition of a
loan ceiling of $10 million by all US financial institutions, a prohibition on
the sanctioned business from acting as a primary dealer of US treasury bonds, a
ban on US export-import assistance, and a denial of licences that approve the
export of controlled technology to that business. After Senator Kennedy added
Libya to its remit, the legislation became the Iran-Libya Sanctions Act (ILSA)
as it passed through Congress in July 1996.
To date ILSA has not been enforced, although its spectre has occasionally been
raised, most notably in the six months after an international consortium
— led by the French oil giant Total SA but also including Malaysia’s Petronas and Russia’s Gazprom — signed a $2 billion contract with the Tehran authorities in October 1997 to
develop part of the massive South Pars field. After seven months of perusal,
President Clinton eventually gave in to strong international pressure and used
the discretionary powers under Section 9(c) of the legislation to waive the
enforcement of the sanctions on the grounds that doing so is
‘important to the US national interest’. Since then the State Department has conducted official investigations into a
number of other deals, notably those struck by Shell, Eni and Sheer Energy, the
Canadian company that in 2002 was awarded an $88 million contract to redevelop
the Masjid-i-Suleiman field.
The reluctance to enforce ILSA against Total encouraged other international oil
companies to consider making new arrangements with Tehran.
‘Dozens of foreign companies are watching our reaction to the Total deal,’ D’Amato and Rep. Ben Gilman, the House International Relations Committee chairman,
had argued in 1997;
‘if we do not sanction Total as an ILSA violator, it is likely that foreign
investment will pour into Iran
’s oil and gas fields’. They were proved right, and within months there was a flurry of international
interest in the Iranian market. On 1 March 1 999 the Iranian government signed
a deal with the French Company Elf Aquitaine and Italy
’s ENI to develop the Dorood oil field near Kharg Island in the Persian Gulf,
while the following month Elf made its second deal with Iran, this time siding
with Bow Valley Energy of Canada to strike a $300 million contract to develop
the Balal offshore oil field, another vast deposit with recoverable reserves of
around 100 million barrels. In both Iranian and American eyes, each and every
one of these deals undermined the credibility of the Iran-Libya Sanction Act by
driving, as one Iranian official has put it, a
‘nail into the coffin’ of the US embargo.[15]
This is not to say that the threat of US sanctions does not continue to loom
large for many would-be international companies, particularly those that feel
highly vulnerable to retaliation because they happen to have a large number of
American investors or because they hold a large stake in the American economy.
Even after Clinton backed down from penalizing Total
’s 1 997 deal to develop South Pars, the threat of ILSA, though receding,
probably still played some part in subsequently deterring an Indonesian
company, Bakrie, from making a bid to develop the Balal oil field and has
subsequently continued to significantly restrain international development in
the Iranian petroleum industry. Perhaps the main example of the dark shadow
that ILSA continues to cast is provided by the proposed pipeline to move
Caspian oil across Iran to the Persian Gulf: although on paper this proposal is
easily the most attractive option, American pressure always made another much
less viable option by far the most likely contender.
Yet the political obstacles that inhibit ILSA’s enforcement have not led to any strident demands in US political circles to
repeal the legislation and to rethink the economic or political relationship
with Tehran. Nor, for that matter, has the huge cost to American industry of a
trade embargo with a country that after 1995 immediately found other
international purchasers of its oil and whose domestic market has yielded huge
profits that American businesses have had to watch their rivals reap. Far from
it. Iran continues to be castigated in American politics as a
‘terrorist’ and ‘nuclear-arming’ state, and in Congress a powerful call to restore economic and political ties
with Tehran continues to be heard only rarely.
It is from the fusion of these two factors — Iran’s natural resources and an American economic embargo on that country — that a very volatile political creation has been born. The tensions are
obvious. If American businesses cannot trade with Iran, then of course a void
is created that can be filled by other countries that Washington would
ordinarily consider rivals or even enemies. Moreover American allies and
‘non-aligned’ countries are being pulled in one direction by the looming shadow of the
Iran-Libya Sanctions Act and by the more gene-ral political and economic weight
of the United States, which wants to stop them from supporting the Tehran
regime. But they are also being pulled in the other direction by their need for
Iran
’s natural resources and by the huge profit that the demands of its domestic
mar-ket, created in large part by the oil and gas industry, increasingly offer.
Why, though, are such tensions particularly evident now rather than at any
previous time? After all, as this chapter began by saying, Iran
’s natu-ral resources have in some sense always been deeply ‘political’.
THE POLITICS OF ENERGY
If Iran’s possession of such outstanding natural resources has always had powerful
political ramifications, then those that are in evidence today are no more or
less potent than those that have preceded them.
Right from the onset, there was bitter international rivalry to gain control
over Iranian reserves. This was initially a privilege that belonged exclusively
to the British government, which took full advantage of a deal struck in 1901
between William Knox D
’Arcy and Shah Muzzaf-far al-Din that gave the British entrepreneur an exclusive
right to search for oil in a vast area of Persian territory. After 1908 British
ministers helped establish the Anglo-Persian (later Iranian) Oil Company (AIOC)
to explore and develop the Persian oil that was particularly indispensable to
the Royal Navy after Churchill
’s decision, as First Lord of the Admiralty, to convert the fuelling of ships’ engines from coal to oil. But such a valuable asset inevitably raised the
strong interest of foreign governments, and equally strong fears in London of
their plots to seize the Persian jewel. In 1919 the British government
effectively assumed control over Persia under the terms of a new Anglo-Persian
agreement that was partly intended, as Foreign Secretary Lord Curzon announced,
to prevent
‘enemy intrigue’ in a country that could be ‘overrun by Bolshevik influence from the north’. And when, in the early stages of the Second World War, thousands of Nazi
agents arrived in Tehran hoping to strike a deal with the shah in case the
German armies in North Africa or Russia got close enough to the Iranian border,
the British did not fail to act, launching a full-scale invasion of the country
in August 1941 that, together with Russian actions further north, took just two
weeks to overwhelm the shah
’s army.
Having been ruled by outsiders for so long, a nationalist reaction within Iran
always seemed likely, and it emerged most unmistakably in April 1951, five
years after a serious outbreak of rioting in the refinery port of Abadan had
yielded clear proof that popular attitudes among Iranians to British
involvement were hardening considerably. On 28 April, as a chorus of
nationalist rhetoric at all levels of Iranian society grew louder, the Iranian
parliament, the Majlis, voted in favour of the proposals made by Prime Minister
Mohammed Mossadeq to nationalize the Anglo-Iranian Oil Company. Under the terms
of the legislation, the Iranian government would now audit the AIOC
’s books and establish a new National Iranian Oil Company while giving British
shareholders some unspecified amount of compensation for the loss they would
incur. So many years on, the strength of the feelings of devastation, panic and
anger that such a move provoked in London is difficult to imagine. Keen to
recapture some of its lost status in Iran, the British government initiated an
operation to topple Mossadeq but was foiled when his security chiefs got wind
of these efforts and closed down the embassy in Tehran where the operation was
based. But London
’s efforts to implement regime change were then resumed by a US administration
fearful that the Soviets might succeed in winning Mossadeq
’s sympathy and, by extension, get some degree of control over Iran’s resources. As Secretary of State John Dulles was reported as saying: ‘The communists might easily take over [Iran]. ... Not only would the free world
be deprived of the enormous assets represented by Iranian oil production and
reserves but the Russians would secure these assets and thus henceforth be free
of any anxiety about their petroleum situation.
’ [16] In an operation of astonishing ingenuity, audacity and cleverness, the CIA
operation, led by the highly resourceful and daring Kermit
‘Kim’ Roosevelt, succeeded in finding key opponents of the premier, mainly within the
Iranian armed forces, while bribing others whose loyalty was wavering, and on
19 August 1953 succeeded in forcing Mossadeq to step down and hand over the
premiership to his Washington-sponsored successor, Fazlollah Zahedi. Operation
Ajax, against seemingly impossible odds, had worked.[17]
Over the next three decades, until the eve of the Islamic revolution in 1 979,
Washington was extremely concerned to keep Iran
’s resources, as well as those that moved along the Persian Gulf that straddled
its southern borders, out of Soviet hands. Sharing a long and in places porous
border with the Soviet Union, Iran seemed highly vulnerable not just to a
military attack but to a campaign of infiltration and subversion of the sort
that the Russians were often thought to excel at, and this prompted the
Americans to nurture and sustain a very close relationship with Shah Mohammed
Reza Pahlavi
’s regime. Successive Washington administrations now provided Iran with vast
amounts of economic assistance
— around $200 million in the three years that followed the 1953 coup — and very considerable military support, as vast numbers of American soldiers
and advisers as well as huge quantities of equipment poured into the country.
Not surprisingly, the Shah was adept at playing the Soviet card in order to
maximize concessions from Washington: just before the 1962 Cuban missile
crisis, for example, he openly pledged not to allow the deployment of foreign
— and, by deliberate implication, American — nuclear missiles on Iranian soil, even though this pronouncement was really
just a clever tactic designed to increase his political leverage over the
Kennedy administration.[18]
So from a glance at its history, it is clear that Iran’s possession of such immense natural resources has always had very powerful
repercussions, both within and outside its own borders, and this means that
there is clearly no novelty in the assertion that there is, in its own right, a
discernible
‘politics of energy’: it is self-evident that any country’s possession of such resources of oil and gas has such strong political
repercussions in the same way as the possession of any other valuable asset.
But the novel impact of Iran
’s natural resources on the outside world lies not in their politicization but in
the unique challenge to American power that they are now posing.
This, in turn, prompts another obvious question: why is this challenge of
particular importance now rather than, for example, in 1995 and 1996, when the
existing US economic sanctions were first introduced, or for that matter in the
year that followed the 1979 revolution, as relations between Washington and
Tehran crashed and reached a nadir? Put simply, the main reason is that
Washington is now seeking to put more pressure on a country with which other
governments and businesses have more reason than ever before to strike deals.
WHY IRAN’S RESOURCES MATTER NOW: GREATER AMERICAN PRESSURE
The basic reason why Iran is now posing a greater challenge to American
interests than ever before is simply that Washington is currently more anxious
than at any previous time to pressurize its allies into toeing its own line at
the expense of doing business with Tehran.
This can be measured by drawing a contrast between the events of 1997, when the
Clinton administration weighed up the arguments for and against invoking ILSA
to penalize the Total-led consortium, and events in US Congress in the course
of 2005. On the one hand, Clinton
’s 1998 decision not to invoke ILSA against Total provoked only relatively
isolated cries of protest from lobby organizations such as the American-Israeli
Public Affairs Committee (AIPAC) and from within Congress. Furthermore only a
small number of senators had also actively sought to penalize the two other
companies in the project, Petronas and Gazprom, even though both were
particularly vulnerable to American retaliation: the giant Russian firm
Gazprom, for example, signed the deal to develop South Pars at the same time
that it was seeking to raise $1 billion in US capital markets for Russian
projects and to purchase of $750 million in US goods and equipment.
But in the course of 2005, on the other hand, Congressional demands to tighten
the economic noose on international trade with Iran were becoming louder and
more insistent and, by the early summer, support for a revision of ILSA had
grown considerably. In April 2006 the House of Representatives approved by an
overwhelming majority of 397 to 21 the Iran Freedom and Support Bill,[19] which
tightened and codified the 1996 legislation, widening its scope while also
threatening to slash or even cut out any US foreign aid received by a
government that fell foul of the bill
’s terms: one section of the new legislation, for example, proposed extending
ILSA
’s reach to insurers and creditors, greatly multiplying the number of people who
fell within its remit, while another removed the
‘sunset provision’ originally written into the legislation which ensured that it would be reviewed
in Congress every five years. Finding equal support among Republicans and
Democrats, the proposed legislation was also strongly supported by AIPAC, which
at its annual meeting in Washington in May made its implementation a high
priority, and by some other pressure groups. Although the bill still faced big
hurdles before it became law, its passage was an unmistakable sign that, among
many highly influential people on Capitol Hill, attitudes were hardening. Other
critics of Iran wanted to take things further still. On 7 February 2005 Senator
Ron Wyden had also introduced the Investor in Iran Accountability Bill, which
was intended to shine a spotlight on those American companies that were still
using independent foreign subsidiaries to defy the US trade embargo and do
business with Iran in the energy sector. The new bill required the Treasury
Secretary to publish a list of those American companies whose overseas
subsidiaries continued to do energy deals with Iran and had more than $1
million invested in these concerns. The legislation also sought to frighten off
these businesses by making their dealings with Iran more transparent to
American investors: it proposed to do this by requiring the Treasury Department
to publish a list of all public and private US financial interests that held
more than $100,000 worth of investment in those companies. It was this
increasing pressure from within Congress and from American investors that in
February 2005 prompted Halliburton to stop its independent overseas
subsidiaries from dealing in Iran. Threatened with an official investigation
into any possible breach of existing sanctions, and under mounting pressure
from a number of shareholders about its ties with Iran, the company initially
responded to shareholder concern by listing its Iranian activities, which
included an annual $30-40 million of oil-field service work plus a number of
comparatively small engineering and design projects, before finally withdrawing
its subsidiaries from the country altogether.[20]
Later on in the year new legislation was also introduced into the Senate to
restrict American businesses from obtaining nuclear fuel assemblies from any
other company that also sold them to Iran. Originally proposed in September by
Senator Rick Santorum, just as the Iranian nuclear controversy appeared to be
reaching a diplomatic climax in Vienna,[21] the Iranian Nuclear Trade
Prohibition Act of 2005 targeted fabricated nuclear items that contained
enriched uranium and outlawed their purchase by any American business from
another business, entity or government that also sold to Iran.
‘Iran’s support for terrorist organizations, its past record of nuclear enrichment
deceit and its opposition to US foreign policy objectives in the Middle East
make Iran one of the most pressing national security issues facing the US and
the democratic countries of the world,
’ Santorum said, ‘and the US must take this important step toward eliminating nuclear activity in
Iran.
’ This proposal, as well as the other legislative proposals, prompted Nicholas
Burns, the Under-Secretary of State for Policy, to write to Santorum on 13
October pointing out that the administration was worried that the new rules
‘would impair our ability to continue working closely and successfully with our
allies
’ on the Iranian issue.
These proposals formed part of a growing chorus for action against Iran that had
been increasingly audible over the preceding two years. In the summer of 2003,
for example, moves had been made to reduce the president
’s scope to waive and exempt foreign companies that fell foul of ILSA, notably
Rep. Ileana Ros-Lehtinen
’s bill, introduced on 21 October 2003, to limit these exemptions. Known as the
Iran-Libya Sanctions Act Enhancement and Compliance Act (ILSA-ECA), the bill
sought
‘to address the concerns, loopholes and changes in the world since the original
bill
’s passage in 1996’ not only by narrowing the conditions under which the White House could waive
the law but also by extending the classification of the parties subjected to
sanctions to include public and private financiers and lenders. The bill also
made the removal of sanctions contingent on a presidential certification that
Iran and Libya no longer pose a
‘threat to the national security of the United States, its interests or allies’.
There are two main influences that have made the case for primary and secondary
sanctions against Iran more pressing in the course of George W. Bush
’s successive presidencies. These are Iran’s nuclear project, which had taken sudden and unexpected strides since ILSA was
first introduced, and its association in many American eyes, stronger than ever
before, with
‘terrorism’.
THE NUCLEAR ISSUE
Undoubtedly the single most important reason why Iran’s natural resources are now undermining American global power is the increasing
sophistication of the Tehran regime
’s nuclear programme. Although Iran is still reckoned to be some years away from
developing a warhead, its nuclear programme is now known to be vastly more
sophisticated than at the time when the existing range of US economic sanctions
against Iran were drawn up and enforced.
Until the summer of 2002 most independent experts harboured little doubt that
Iran had a covert nuclear weapons programme, which its supposedly peaceful
programme to provide civilian energy was intended to disguise. But the Iranians
painfully lacked the core ingredient of a bomb, notably the heavily enriched
uranium or weapons-grade plutonium from which the fissile material is derived,
and it was widely assumed that the prohibitive costs of developing such a
facility would force the Iranians to import these ingredients from foreign
sources, probably looking to the cash-starved former Soviet Union where such
resources were likely to be available and where local authorities could perhaps
be easily bribed.
The revelation in the summer of 2002 that Iran had secretly constructed much of
its own infrastructure to enrich uranium therefore sent shockwaves of alarm and
outrage throughout many international capitals. At a press briefing in August,
spokesmen for a dissident organization made dramatic revelations, based on
information said to have been supplied by Israeli intelligence, about the
existence of two nuclear complexes of which the outside world was wholly
unaware. One was a vast uranium enrichment facility at Natanz, approximately
200 miles south of Tehran, made up of six buildings that in total covered
around 100,000 square metres, while the other was a site at Arak where the
Iranians intended to build a heavy-water reactor from which the plutonium
required for the fissile material of a warhead could easily be extracted.
By failing to declare the existence of these facilities to the International
Atomic Energy Agency (IAEA), the Iranians had not strictly violated the terms
of the 1968 Nuclear Non-Proliferation Treaty (NPT) or the subsequent Safeguards
Agreement that gave substance to the earlier deal. Yet this hardly reassured
either critics of Iran or enemies of proliferation. With a capacity to house as
many as 50,000 of the centrifuge machines used in the enrichment process, the
Natanz complex potentially could produce between 400 and 500 kilograms of
weapons-grade uranium, enough to make perhaps as many as 20 nuclear warheads,
while according to non-governmental estimates the Arak reactor, when completed,
could also annually produce between 8 and 10 kilograms of plutonium. After an
IAEA visit to these other sites the following February, the Iranian nuclear
programme was judged to be
‘extremely advanced’,[22] far more so than even the most audacious independent assessments had ever
expected.
In February 2003, a few months after the original revelations were made, Iran
appeared even closer to attaining its own self-contained nuclear fuel cycle
when President Khatami announced that deposits of uranium had been discovered
in Iran for the first time and that these were already being mined in the
Savand area, 200km from the historic city of Yazd. Although the process of
converting this natural uranium into the highly refined product used by a
warhead is very difficult and time-consuming, this was not much reassurance to
those for whom the prospect of an Iranian bomb has always been an unacceptable
proposition.
The further revelations certainly continued to electrify political circles in
Washington and elsewhere, and as preparations for the invasion of Iraq gathered
pace, many people began to wonder if it was really Iran, not Saddam Hussein,
that the Bush administration should be focusing its sights on. Administration
spokesmen such as the State Department
’s Richard Boucher announced their ‘very grave concerns that Tehran is using its supposedly peaceful nuclear
programme, including the construction of a reactor in Bushehr, as a pretext for
advancing a nuclear weapons programme
’. In practice Iran was probably still years away from completing such a
programme, as the National Intelligence Estimate and highly respected
independent experts [23] pointed out, but it was nonetheless much further along
the road to doing so than had previously been realized.
From this moment on, the task of preventing the prospect of an Iranian bomb from
becoming a much feared reality became a particularly pressing concern for
Washington, even if it was for the moment overshadowed by the task of removing
Saddam Hussein from power and subsequently keeping the peace in the new Iraq.
In order to obstruct the Iranian nuclear project, the Bush administration
echoed the Clinton line by seeking not just to pressurize Tehran into
renouncing its nuclear ambitions but also to starve the regime of the foreign
exchange it needed to fund such a project, even if that meant persuading the
international community to minimize its trade with Iran. But when the outside
world has a dire and growing need for oil and gas, this pressure can only be
politically highly volatile.
The nuclear issue is one reason why the advocates of sanctions against Iran have
been able to withstand the strong opposition of American business.
Organizations such as
‘USA Engage’, an association of more than 675 US companies, has reckoned that these
sanctions cost American business a total of $19 billion per annum in lost
revenue, along with 250,000 jobs.[24] But there is also one other reason why
anti-Iranian feeling on Capitol Hill has not only been able to withstand this
pressure but has also been strengthening.
TERRORISM
The other main reason, besides its nuclear programme, why Iran is an even more
contentious issue in contemporary American politics than when ILSA was first
drafted is its association with
‘terrorism’. For although Iran has been consistently labelled by the US State Department as
‘the world’s most active sponsor of terrorism’ for more than a decade, several recent developments appear to have considerably
strengthened this argument.
From an American perspective, the Bush administration’s post-9/11 preoccupation with defeating ‘terrorism’ has played straight into the hands of Iran’s enemies on Capitol Hill, who have emphasized to great effect Iran’s qualifications as a terrorist state. In particular, Israel’s strongest supporters point to Iran’s association with an organization that many influential American politicians
have always wanted to put in the firing line of the
‘War on Terror’ — the Lebanese movement Hezbollah. Within days of the attacks on the World Trade
Center, Tehran had earned a prominent place on the target list produced by an
influential pressure group, the Project for the New American Century, 41 of
whose members had addressed an open letter to President Bush urging retaliation
against Iran if it failed to bring an immediate end to its support for the
Lebanese militia.
Iranian actions, or rather alleged Iranian actions, have also helped to
reinforce this impression. In January 2002 the ship Karine A was intercepted by
the Israelis as it moved through international waters 300 miles off Israel
’s Red Sea coast and was found to be carrying more than 50 tons of arms,
including Katyusha rockets and anti-tank missiles, that had allegedly been
loaded at the Iranian port of Kish before being sent on their way to areas of
the Gaza Strip controlled by the Palestinian Authority. The cargo
’s seizure, said the Israelis, gave ‘incontrovertible evidence’ that Iran was supplying military equipment to the radical Palestinian cause. ‘The connection between the Palestinian Authority and the smuggling operation is
unequivocal, clear and undeniable,
’ stated Chief of Staff Shaul Mofaz at a press conference in Tel Aviv on 4
January 2002, as Prime Minister Sharon, inspecting the cargo at Eilat, argued
that it proved the existence of a
‘network of international terrorism spearheaded by Iran’. Although many large question marks continue to hang over the story of the
Karine A
— even if the Israeli claims are taken on trust, there is no indication of who in
Iran had ordered and organized the operation or why
— such an incident received massive publicity in Washington and certainly
tarnished Iran
’s image more than ever before.
More important, however, has been the alleged involvement of Iran in the
militant insurgency in post-Saddam Iraq. From the moment this campaign began in
earnest, in the summer of 2003, American leaders have pointed an accusing
finger at neighbouring Syria and Iran, claiming that their respective
governments have not just turned a blind eye to the insurgents
’ cross-border movements but given them proactive assistance and training.
Although such claims were initially treated with scepticism, they later
appeared to be taken much more seriously by other countries. By September 2005,
for example, British military officials claimed that attacks on allied
personnel in Basra were to some important degree being orchestrated by the
Iranian government, probably in a bid to intimidate a British government that
was strongly opposed to Tehran
’s nuclear programme and which was at that time lobbying hard for the Iranians to
be referred to the UN Security Council.[25] Similar claims were made in more
mysterious fashion on 5 October, when an anonymous senior British official
addressed a group of correspondents in London and stated that the Iranians were
strongly supporting Shiite insurgents in Iraq. Not all independent analysts
were quite so convinced,[26] especially when Prime Minister Blair admitted on 6
October that
‘we can’t be sure’ of such support, but once again the terrorist label had been firmly pinned on
to Iran.
Events in Iraq and the Karine A incident have accentuated, rather than caused,
Iran
’s identification in American political circles with ‘terror’, which had been forged well before the onset of the attacks on the World Trade
Center. Several political moves against Iran
’s ‘terror’ were made shortly before the 9/11 attacks, for example, and in the summer of
2001 AIPAC organized demands for the renewal of sanctions against Iran on the
grounds that the clerical regime posed a clear threat both to Israel and the
prospects for Middle East peace. And on 23 May 2001 a bill for the renewal of
ILSA, which had originally been introduced in 1996 only for a five-year term,
was introduced into the House of Representatives with over 200 co-sponsors, and
was followed shortly afterwards by a parallel bill in the Senate backed by a
veto-proof majority of senators. This strong and well-organized campaign took
advantage of the new administration
’s post-electoral uncertainty and confounded the hopes of many American
businesses that Bush
’s election would herald a significant change of stance in favour of US economic
interests.
Yet Iran’s image has undoubtedly suffered even more since 9/11, and on Capitol Hill the
sponsors of new legislation have certainly strongly emphasized Iran
’s credentials as a terrorist state. The 2003 ILSA-ECA Act, for example, was
intended to find
‘ways to restrict the increasing wave of foreign investment into Iran and Libya
and must be an integral part of the same effort to suppress terrorist financing
’, claimed Ros-Lehtinen as her bill was debated in June 2003. She added that ‘neither Iran nor Libya have shown signs of relenting in their support for
international terrorism. Those companies who continue to pursue investment in
the oil sectors of these rogue nations, thus enabling this aggression, must
realize that they are bankrolling terrorism. ILSA must be amended to address
its continued financing of terror.
’ Taken together, Iran’s nuclear programme and its alleged support for Middle Eastern ‘terror groups’ have reinforced the case for economic sanctions against Iran, and in 2003 both
were cited by Secretary of State Colin Powell in support of George W. Bush
’s decision to renew the sanctions first imposed in 1995: ‘We’ve raised this issue repeatedly. We’ve talked about the “axis of evil” and been criticized for it,’ Powell argued, ‘and lo and behold, we discover they had a far more robust nuclear infrastructure
that could be used for weapons development than people had thought, or wanted
us to believe. We were seen as suspicious, and we shouldn
’t be moving in this direction, but now we have a real concern. When you marry
that up with their continued support for terrorist organizations that foment
terror in Lebanon and other places throughout the Middle East, I believe that
our concerns with respect to Iran were well founded.
’ [27]
The strength of US concerns about terrorism and the nuclear issue helps explain
why Washington appeared to actively seek regime change in Tehran, or at least
to pave the way for such a radical approach, rather than emphasizing any
constructive role for economic inducements or any other
‘carrots’ designed to dissuade the Iranians from pursuing their nuclear course. Only in
March 2005, four months after the negotiations, did Secretary of State
Condoleezza Rice announce a policy shift by agreeing in principle not to block
Iran
’s application to join the World Trade Organization, having blocked a similar
move to join the WTO the previous December after labelling the EU-Iran
negotiations as
‘a toothless enterprise’. But even then the ‘policy shift’ in Washington fell far short of what EU negotiators had hoped for: the only
sanctions lifted by the US government, Rice announced in March, was a virtually
meaningless offer to sell spare parts to Iran
’s decrepit fleet of civilian airliners. Such reluctance probably reflected the
strong scepticism towards EU3 diplomacy that was reputedly harboured by
Under-Secretary of State Nicholas Burns, National Security Adviser Stephen
Hadley and his deputy, Elliot Abrams, who were said to argue that the
negotiations with Tehran would never succeed but who were prepared to offer
some
‘carrots’ to back them, not because they felt such incentives would work but in order to
secure the support of European powers for American moves to sanction Iran when
the negotiations eventually failed.
But at the same time that Washington, for political reasons, is increasingly
trying to pull the outside world in one direction, another force is also
pushing it in another. This force is a growing need for Iran
’s energy resources, and the other main reason why Iran’s natural resources are now beginning to create more political fissures than
ever before is that the outside world is more dependent on its supply of oil
and gas. This means that Iran is now better placed to do deals with America
’s rivals and sustain their energy requirements or to tempt Washington’s allies into breaking any US-led embargo on Iranian trade.[28]
INCREASING GLOBAL DEMAND FOR OIL AND GAS
The world’s growing need for Iran’s oil and gas reflects both increasing global demand as well as the diminishing
capacity of many existing sources of supply to satisfy those demands in the
long term. This lack of confidence in the capacity of existing sources partly
reflects the fact that the world
’s oil reserves, even if they are consumed at a steady rate, are becoming
increasingly inaccessible. So although Saudi Arabia, like all the other Gulf
states, still harbours vast deposits of oil, some of which are perhaps still
undiscovered, billions of dollars would need to be invested in its
infrastructure if these reserves are to be tapped. According to the
International Energy Agency, the Persian Gulf producers would have to spend an
estimated $523 billion on new equipment and technology in the three decades
between 2001 and 2030 in order to increase output and meet global demand.[29] This represents not just a huge financial and technological hurdle but also a
political one, since it would have to be backed by international loans that
would offend the Saudis
’ proclaimed wish to retain complete control over their nationalized energy
sector, which is dominated by the state oil company Saudi Aramco.[30] Other
political and legal obstacles to foreign investment also obstruct the
development of oil fields in Kuwait, the Emirates and Qatar.
This was the message from the International Energy Agency, the oil sector
monitoring body, which struck a note of alarm in 2005.
‘It is not a problem of availability of reserves or capital,’ as Fatih Birol, the group’s chief economist told a British newspaper; ‘we need to be sure that the increase in production will be high enough and a
sustained production capacity increase is in place. That will need sustained
political will.
’ But although Saudi Arabia would need to almost double current output of 10
million b/d to meet the level of demand anticipated in 2030, Mr Birol said that
the kingdom might muster the long-term political will to produce just over half
the extra barrels deemed necessary.[31]
Outside the Gulf, oil production has been stagnating, sometimes declining, in
areas that were once highly productive. The output from Mexico
’s major oil field, the Cantarell site in the Bay of Campeche, for example, has
naturally depleted over a number of years and is not expected to recover,[32] while many of Venezuela
’s fields, some of which have been in operation for a century or so, are also
unmistakably waning. In 2005 Britain also became a net importer of oil for the
first time in more than three decades, as its North Sea reserves became
depleted. In other parts of the world, some of the most plentiful oil reserves
are also the most inaccessible: Kazakhstan
’s newly discovered fields, for example, are located in a section of the Caspian
Sea that freezes over in winter, making drilling operations extremely
difficult, while Angola
’s fields are situated in very deep ocean waters. International investment in
developing these deposits is also deterred by high political obstacles, notably
endemic corruption, political instability and complex legal and financial
barriers.
But while international governments may feel less sure than before about
securing long-term supplies, global demand is also growing, and US Department
of Energy figures show that between 2001 and 2025 major Middle Eastern oil
producers will have to double their total daily output to satisfy growing
demand.[33] This is partly because there is much greater demand in the
developing world, whose populations and economies are rapidly expanding and
whose consumers have higher expectations of material comfort than ever before.
A classic case in point is India, whose annual rate of population growth
averages between 3 and 4 per cent
— roughly the same as Pakistan — and whose fast-expanding economy has created a new ‘middle class’ with a sophisticated taste for Western comfort. Another example is China, whose
consumption of oil alone in the next 25 years is expected to jump from 6.5 to
12.8 million barrels per day, while demand in Asia as a whole will rise from 1
5 million to 32 million. Yet this increase in demand is certainly not just
specific to any particular country or region but is instead a global
phenomenon: in the United States, for example, demand for petroleum is
projected to increase to around 27 million barrels of oil per day by the year
2020, compared with its daily demand of 20 million barrels in 2000.[34] The
United States has had the occasional glimpse of this pending oil crisis, when,
for example, Hurricane Katrina crashed through New Orleans in 2005 or after the
steep oil price increases of 1999-2000 prompted the Bush administration to
dramatically assert that
‘America in the year 2001 faces the most serious energy shortage since the oil
embargoes of the 1970s
’.[35]
Most experts also expect a dramatic increase in global demand for natural gas
over the next quarter century or so, even though this is likely to be tempered
by high prices. In 2005 the International Energy Outlook forecast an average
annual increase of 2.3 per cent, well above the 1.9 per cent increase it
predicted for oil consumption. This overall 70 per cent increase in global
demand, from 92 trillion cf in 2002 to 1 56 trillion cf in 2025, partly
reflects the robust growth of the developing world, which needs natural gas to
power electricity, but also the increasing tendency to view gas as a more
efficient, cost-competitive and cleaner fuel than oil. These considerations
also explain why European demand is projected to grow at a high annual rate,
estimated to be around 1.8 per cent, which will make its governments far more
dependent than ever before on imports. On the assumption that the production of
European gas stays flat at 10.6 trillion cf this means that gas imports will
have to increase to 17 trillion cf each year by 2020.
For those countries that are not hindered by geographical or political obstacles
from doing business with Iran, the rest of the world
’s growing need for oil and natural gas has clear consequences. Most obviously it
means that no such country would be able to join any US-led embargo on Iranian
oil. In an ideal world, the US would of course always have liked to see its
European allies follow its example and impose an oil embargo on Iran, in the
same way that in the two years following Mossadeq
’s nationalization of the AIOC in 1951 the British navy successfully imposed a
blockade of oil exports that crippled the Iranian economy. But many of America
’s allies import huge quantities of Iranian oil: in 2004 Japan imported 572,000
barrels a day, Korea 105,000 and Western Europe 620,000.
The key difference is simply that the British embargo was made possible by a
glut of world oil, whereas today
’s relative shortage means that Washington cannot make any comparable demands on
its European and other allies whose economies are both very oil-dependent and
highly susceptible to any increase in its price. Similarly the oil-importing
countries were in a much stronger position in the early 1980s, when they
successfully withstood the major oil supply disruption that followed the
outbreak of war in September 1980 between two countries, Iraq and Iran, that
were both leading members of the Organization of Petroleum Exporting Countries
(OPEC). Although this conflict suddenly reduced world oil supplies by
approximately 4 million barrels a day, most countries had very substantial oil
reserves that had been built up after the shocks of the Iranian revolution had
exposed the need for contingency measures. Weak oil demand and a prompt
increase in Saudi production partially offset lost Iranian and Iraqi oil
exports and allowed the importing nations to avoid the disastrous pressures
that had done so much to cause the price explosion of 1979.
Rather than seeking to restrict their oil and gas imports, Washington could more
realistically expect its allies to sacrifice some of their trade and investment
with Iran in order to pressurize Tehran into renouncing or at least freezing
its nuclear programme. But this, too, is ambitious because Iran
’s energy infrastructure — the exploration, development and production of oil and gas (‘upstream’ contracts) as well as work in refineries and the petrochemical sectors (‘downstream’) — offers huge profits. Not only this but Iran is also awash with the revenue
earned from the rise in the price of oil, which has helped to generate both
sufficient cash to fund a hugely expensive nuclear programme as well as a
domestic market for imported goods. So Washington
’s European allies have in recent years had more reason to ignore any such calls
made by successive US administrations to restrict their trade and investments
in Iran: in particular there have for some years been very strong
German-Iranian commercial ties, and although Iran comes only 35th on the list
of Germany
’s trading partners, it is an up-and-coming market with a high growth potential.
Such interests doubtless play an important, probably decisive role in
explaining why Germany has often been at odds with Britain and France in the
negotiations with Iran over the nuclear issue, prompting some of those involved
in the talks to humorously talk of the
‘E2’ rather than the ‘E3’.
Even if any country ever did impose such trading sanctions while continuing to
import Iranian oil, then Iran could clearly retaliate. In the summer of 2005,
as Tehran defied international pressure by resuming parts of its uranium
enrichment programme, Iranian negotiators hinted that they would respond to any
bid to impose UN sanctions on their country by withholding the export of oil.
Interviewed by the Khaleej Times on 1 October 2005 about possible Iranian
counter-measures if such sanctions were enforced, newly elected President
Mahmoud Ahmadinejad replied tersely that
‘if Iran’s case is sent to the Security Council, we will respond in many ways — for example by holding back on oil sales or limiting inspections of our nuclear
facilities
’. And in a clear warning to the EU the previous month, he also informed Iran’s parliament that ‘economic ties are not irrelevant to political ties’ especially with ‘hostile’ countries that ‘fail to recognize Iran’s legitimate rights’.
Any such retaliation would of course greatly injure an Iranian economy whose
foreign exchange earnings are highly dependent on oil exports, and most
analysts are divided on the question of whether Tehran would really be willing
to carry out its threats. Yet there are many countries that are far too
dependent on both the importation of Iranian oil or on the price of oil
whatever its origin to be willing to take that risk. So when the cost of a
barrel rose sharply in the aftermath of Hurricane Katrina in 2005 and briefly
reached $70, EU ministers warned that economic growth throughout Europe would
be seriously imperilled. With growth in Europe already slower than expected,
warned British Chancellor of the Exchequer Gordon Brown at an EU conference in
Manchester in September 2005, fuel prices had made a recovery
‘more fragile’.[36] Of course many of those who heard this warning wondered if oil prices were
really just a convenient excuse for his own failings, but no one disputed that
they made things worse. Not just that, but higher fuel prices for ordinary
consumers also exact a painful political cost for a government that gets the
blame for not reducing the levies that constitute much of the price at the
pumps. In September 2000, for example, the British government was rocked by a
blockade of fuel refineries by protestors who blamed high petrol costs on
exorbitant levels of government taxation, while prices at the pump were also
expected to be a big issue in the US mid-term elections in November 2006, as
polls showed that a large majority of Americans disapproved of how President
Bush was handling gasoline prices.[37] Such adverse consequences, political and
economic, would affect every country that imports oil, no matter where it comes
from: because Iran is the second largest producer of oil in OPEC, any embargo
of its oil would have an impact that extended far beyond just those countries
that directly imported it.
Not surprisingly, Iranian negotiators have been quick to play on such fears. So
on 5 March 2003 Iran
’s top nuclear official warned the United States and Europe of the danger of an
oil crisis if Tehran was sent before the UN Security Council over its nuclear
programme, before rejecting outright their demands to halt uranium enrichment.
Taking the matter to the Security Council would be
‘playing with fire’, claimed Hassan Row-hani, emphasizing that ‘the first to suffer will be Europe and the United States themselves’, and that ‘this would cause problems for the regional energy market, for the European
economy and even more so for the United States
’. And in November the following year, as the nuclear crisis reached one of its
many climaxes, a top aide to Iran
’s supreme leader declared that Tehran was completely unafraid of being taken to
the Security Council over its nuclear programme and warned that if the UN
imposed an oil embargo, world prices would go above $100 a barrel. This
prompted Ali Akbar Nateq-Nuri, one of Ayatollah Ali Khamenei
’s closest advisers, to dismiss as ‘ridiculous’ some suggestions from Europe aimed at persuading Tehran to end uranium
enrichment to avoid being summoned by the Security Council.[38] After Iran
’s referral to the Council by the IAEA in February 2006, the Iranians continued
to make similarly threatening noises. On 8 March an official statement
threatened
‘harm and pain’ in the event of confrontation over the nuclear issue, while on 14 March the new
Oil Minister, Kazem Vaziri-Hamaneh, said that Tehran could revise oil supply
contracts with those countries that supported the passage of UN sanctions. The
Economy Minister, Davoud Danesh -Jafari, had made similar threats a few weeks
before by warning that
‘any possible sanctions on Iran from the West could possibly, by disturbing Iran’s political and economic situation, raise oil prices beyond levels the West
expects
’.
IRAN AND FOREIGN INVESTMENT
There is another, less important reason why Iranian natural resources present an
increasingly important challenge to American power. For not only do
international governments have better reason than ever before to import Iranian
supplies of oil and gas but the Tehran regime is also making greater efforts to
lure international investors into its exploration, production and development.
The importance of these efforts should not be exaggerated, because the Iranians
are currently still almost as far from making the most of their resources as
they have ever been, but they have certainly not gone unnoticed by
international business.
Iran’s drive to attract foreign investment is not just confined to the oil sector but
is part of a much wider economic drive that was spelt out in 2004 when Mohammed
Khazai, the Deputy Minister of Economy and Finance, acknowledged that the
Iranian economy as a whole would need a $20 billion sum of investment over the
next five years if its economy was to expand quickly enough to absorb the
demands of a rapidly growing population. But the country
’s oil infrastructure is in particular need of such investment and the National
Iranian Oil Company (NIOC) has estimated that at least $70 billion is needed
over the next ten years to modernize it. The Tehran government knows that such
targets will never be reached without a massive flow of capital from abroad and
hopes that foreign investment will eventually make up not less than 40 per cent
of the overall total: as the Deputy Petroleum Minister, Akbar Torkan, told the
National Seminar on the Attraction of Foreign Investment, held in Tehran on 5
December 2004, roughly $17 billion of this overall figure was expected to come
from domestic sources, $25 billion through a programme of contracting foreign
companies and a further $28 billion through the international financial
markets.
‘We should be thinking of drawing foreign investments and [of] preparing the
ground for [an] inflow of foreign capital,
’ as Khazai has emphasized.
There are a number of reasons why Iran’s oil sector needs such vast sums. During the eight years of war with Iraq, some
of the most important fields were badly damaged by overproduction, neglect or
military action: several platforms on the Soroush and Nowruz fields were badly
damaged by the Iraqis, while others at the Resalat and Reshadat fields were
attacked and hit by US warships in the latter stages of the conflict, prompting
Iran to make a bid, ultimately unsuccessful, for compensation in the
International Court of Justice. Furthermore over the past 20 years Iran has
been a politically isolated country that painfully lacks the technical
expertise needed to develop its resources, especially when many of its most
skilled workers have emigrated. The Iranian authorities have also been
reluctant to invest the proceeds of oil sales back into the industry because
much of this exchange is needed for other purposes, such as subsidies in the
manufacturing or agricultural sectors, which are considered to be politically
more pressing.
Yet such difficulties have not deterred the Iranians from entertaining high
hopes for their oil industry. Wanting to increase their oil production
essentially in order to generate more foreign exchange, NIOC officials hope to
steady daily output of oil at 4.5 million barrels by the end of 2005 and
increase production capacity to 5.4 million by 2009 and to 7 million by 2024.
Although Iran has previously come close to reaching such a staggering rate of
output
— in 1974 its maximum daily output was a colossal 6 million barrels — such targets look unrealistic to most independent analysts. These figures look
even more daunting because of the rate at which Iranian output has in recent
years been levelling off, with onshore production declining at a rate of around
8 per cent per annum and offshore around 13 per cent per annum:
‘this means Iran is losing 350,000 b/d of capacity each year’, one leading consultancy has claimed.[39]
Some significant steps in attracting the billions of dollars it needs have been
taken, however. In November 1995 Iran made new and sudden efforts to woo
international investors for help in developing 11 large oil and gas offshore
projects, reviving pre-revolutionary ambitions to make maximum economic use of
its reserves. To this end it held a major conference in Tehran at which NIOC
officials gave technical details for these projects to representatives of
foreign companies. And in late 1997, two years after declaring an ambition to
fully develop the country
’s massive oil and gas reserves, the Majlis broke new ground by announcing that
foreign companies would in principle be eligible to bid for forthcoming onshore
exploration and development projects, even though foreign involvement in such
schemes had previously been considered by many to be a violation of Iran
’s ‘territorial integrity’.
In May 2002 a very limited step towards attracting foreign investment was also
taken when Iran
’s Expediency Council approved a ‘Law on the Promotion and Protection of Foreign Investment’, streamlining the complex procedures that were thought to be restricting the
flow of capital and to give foreign investors more guarantees that they would
not lose their funds. This legislation, which came into effect five months
later, retains many of the features of its predecessor, which had been
unchanged since it was first introduced in 1956, but also extended its scope by
bringing nearly every different type of foreign investment under its wing. Its
importance should not be exaggerated, however, since many of its terms are just
too nebulous to give would-be investors proper reassurance .[40]
The Iranian authorities have made particular efforts to attract foreign
investment in the petrochemicals that are manufactured from the natural gas
supply. The first Iran Petrochemical Forum was held in April 1999, at which
more than 600 potential foreign investors heard Bijan Namdar Zanganeh outline
plans to attract international interest. Special economic zones would be set
up, it was announced, where joint venture operations would receive extended tax
holidays of up to six years as well as exemptions from import-export
regulations. Kish Island, on the Gulf Straits, is one such economic haven for
investors, and an increasing number of foreign businesses are avoiding their
tax liabilities by registering in Kish while setting up representative offices
in Tehran. In its bid
‘to give assurance to potential international investors’, the Iranians also hired the German investment bank Dresd-ner Kleinwort Benson
to conduct a detailed study of Iran
’s petrochemical expansion and prepare a comprehensive report that foreign
investors could use as a guide.
Iran has also been reviewing and modifying some of the other rules to which
international investment has previously been subjected and by which many
investors feel themselves to have been unreasonably constrained. From 2003, for
example, it has taken some steps to alter the workings of the
‘buyback’ model of contracts, established under the 1 987 Petroleum Law, that were
intended to circumvent a constitutional prohibition on the granting of
petroleum rights to foreign concerns.
BUYBACK CONTRACTS
A buyback contract is a fixed-term agreement under which the relevant company
undertakes to finance, construct and commission all facilities not in return
for a direct equity stake in the venture but for a fixed share of oil or gas
production. Thus a company that contracts to spend $1 billion on developing an
oil field would recoup its expenditure, together with interest and profit, from
the field
’s output when it starts to produce oil, after the contract has been completed.
At the end of the contract term, the ownership of that fixed share reverts back
to the National Iranian Oil Company, which is obliged to recoup the contractors
’ agreed costs even if the output of the particular project is insufficient to
meet them. Such deals replaced the granting of emtiaz (concessions) that
allowed foreign companies not only to unilaterally explore, develop and produce
oil but also to subsequently retain ownership in the concession area. These
were outlawed at the time of the 1979 revolution, when they were strictly
prohibited by Article 81 of the new constitution, drafted as it was by a number
of
‘Islamic Marxists’ and ‘red clerics’.
The buyback contract has been widely used since July 1995, when Total and
Malaysia
’s Petronas signed a deal to develop the Sirri A and Sirri E gas fields and
became the first foreign contractors since the Islamic revolution to fix a
stake in the heart of Iran
’s energy sector. By 2004, as its annual report pointed out, Total had four main
buyback deals in Iran that gave it 60 per cent of the production share in the
Sirri A and E fields, 40 percent in South Pars, 46.8 per cent in Balal and 55
per cent in Doroud. Overall NIOC allocated Total an average production of
26,000 barrels of oil a day to recoup its upfront expenditure on these various
projects, a figure that was much lower than the 2003 figure of 50,000 mainly
because of the impact of higher crude prices. But the buyback arrangement has
nonetheless been very unpopular with most international businesses. On the one
hand, such an arrangement gives the contractor no incentive to incur extra
costs, thereby improving total returns for such a project, or to maximize the
life of the field in question beyond the limited time-span of the contract. The
terms of these contracts are also highly inflexible and cannot be renegotiated,
even though this is particularly important if new oil and gas deposits are
unexpectedly discovered, unanticipated technical problems arise or the price of
oil suddenly changes. All sorts of other unexpected events could crop up
— dramatic regional events or important changes in capital markets — that might place the overseas contractor under such immense financial pressure
that they want to pull the deal. The rigid formula of the buyback is
particularly ill-suited to a project as complicated as the three-field
Bangestan gas injection operation, for example, for which a great deal of field
operational information is required if a detailed development plan is to be
drawn up. In other countries a development plan for fields like this one would
usually allow some degree of flexibility when the number of wells is assessed,
whereas the Iranian model of contract only specifies a particular number, which
is very time consuming and costly to renegotiate.
The buyback arrangement has other drawbacks. The relatively brief duration of
the contracts
— about seven years — also means that foreign contractors have little time to build up the spirit of
trust and cooperation with the Iranians that their work requires if it is to be
successful, and prompts them to ask how much they really have to gain when, at
the end of the contract, they are obliged to transfer their up-to-date, highly
valued technology into the hands of the Iranians, who currently lag far behind
the outside world in technological terms. Such a sacrifice is worthwhile only
if the contractor has longer to benefit from such a deal and when the
technology used in the project has become more outdated.
‘In buy-back you develop fields and when it is finished you say goodbye to
everything,
’ a Total official complained to a news agency at the Iran Oil Show in April 2006
.[41] Any company that signs a buyback contract to explore a field, rather than
develop its resources, also risks incurring massive costs before finding that
the field is far less productive than originally expected and therefore offers
no further lucrative contracts that the company would be well placed to bid
for.
The Iranian government has recently made some moves to alleviate the concerns of
international business. Although since 1999 NIOC officials have proclaimed
their willingness to consider almost any kind of financing scheme that
participants want to suggest,[42] there were few real signs that any such
alternatives might be adopted until January 2004, when government officials
announced modifications to the standard buyback model that included an
extension of the contract term from a standard five to seven years to as much
as 25 years, and would potentially allow foreign companies to continue their
involvement in the field
’s development after its tenure was finished and ownership had reverted back to
the NIOC. A few months later Kamal Daneshyar, head of the Majlis Energy
Committee, announced that an ad hoc committee of Ministry of Petroleum members,
industrialists and university professors would flesh out these skeleton
proposals in order to encourage more oil tenders for contracts to explore 16
exploration blocks: the key feature of the revision was that whoever discovered
any commercial oil or gas field would have the automatic right to develop the
find, whereas under the earlier terms the licence holder would have to bid
competitively to develop any commercial discovery. This announcement formed
part of a wider 2005-2010 economic development plan, put forward by Iran
’s parliament, to lure international business into the oil and gas sectors .[43]
The importance of these reforms, like those of the foreign investment laws,
should not be exaggerated, however. After signing the 1997 deal to develop
South Pars, a Total vice-president pointed out that the buyback system had not
weighed heavily against the deal and that there were comparable drawbacks in
other countries that similarly were not insuperable:
‘Iran’s buyback contract system is characteristic of countries reopening their
upstream sectors to foreign oil companies. The scenario is the same in Iraq and
Kuwait. ... These countries have a long history of oil development and their
own national oil companies.
’ [44]
In narrowly economic terms there are in any case a great many other reforms that
are much more important to international business. As one study has claimed,
Iran needs above all to foster a prosperous private sector that would be more
attractive to outside investors than a much less efficient state sector. This
means that some radical steps need to be taken to encourage private
institutions and individuals to buy shares and bonds in all major gas and oil
sectors, even though, strictly speaking, Articles 44 and 45 of the constitution
leave not more than 5-10 per cent of the economy open to the private
sector.[45] By 2005 some initial steps had been taken in this direction,
notably after October 2004, when one of Iran
’s constitutional watchdog bodies, the Expediency Council, overruled earlier
constitutional decrees to block any bid to privatize the energy and other
sectors.
All of these narrowly economic considerations are probably also less important
than the wider framework of international politics. Only very few of the
foreign business representatives who attended the November 1995 Tehran
conference, for example, wanted their names and employers
’ details disclosed for fear of provoking US retaliation, whereas three years
later, in July 1998, many international companies openly expressed interest in
the 40 contracts
— which included opportunities to develop 1 5 onshore sites — that Oil Minister Zanganeh had offered to foreign investors: China’s state-owned National Petroleum Corporation, Cairn Energy in Edinburgh and
Monument Oil and Gas in London all openly bid to develop the Balal offshore oil
field. The difference is essentially that, after the Clinton administration
backed down over Total in 1998, the threat of US sanctions no longer loomed so
large, and while D
’Amato was still privately warning the Canadian company Bow Valley not to make a
bid, his words no longer carried the same weight as before .[46]
While most oil investors take a long-term view on their holdings, Iran is
generally regarded as much more risky than other rival markets because its
nuclear infrastructure might at some point be a future target for American or
Israeli military attack or for UN-imposed economic sanctions. Although most
Western businessmen in Iran have professed themselves to be unconcerned by
newspaper reports of US strikes as long as the EU has continued negotiating
over the nuclear issue,[47] commercial sensitivity to regional politics became
clear on 16 February 2005 when financial markets panicked over reports of an
explosion in Bushehr province which was wrongly assumed to be a foreign missile
attack. Some analysts have also regarded the election as president of the
conservative hardliner Mahmoud Ahmadinejad in June 2005 to be a harbinger of
domestic tension and unrest. Iran has also deterred some investors in the past
because it generally prefers commercial disputes to be considered by Iranian
courts rather than through international arbitration. What is more, the Iranian
oil sector is particularly susceptible to these pressures because of the degree
to which it is closely controlled by the state and therefore highly sensitive
to political tremors: since the revolution, only the oil minister, who is
chosen by the premier, is eligible to be president of NIOC. Also much more
important than its foreign investor law would be Iran
’s signing of the 1994 Energy Charter Treaty (ECT), a framework agreement
intended to promote investor confidence in transnational projects. Some moves
have been made towards this, and in November 2003 the ECT
’s Secretary General, Dr Ria Kemper, was invited to Tehran to discuss possible
membership.
The combined influence of these different factors — an increasing global need for oil and gas as well as Iranian efforts to lure
foreign investors
— have already merged to present American global power with a new and powerful
challenge. But there are of course a great many unknown factors in this
picture, and chief among them is the influence of Iran
’s newly elected president, Mahmoud Ahmadinejad.
THE NEW IRANIAN PRESIDENT
It was said above that the hard, uncompromising line adopted by Ahmadinejad
initially succeeded in alienating some of the international support that he
might otherwise have found. But although he might continue to alienate this
potential support, it is also possible that his harsh approach might force
international governments to make a much more stark choice between
‘Iran’ and the ‘United States’ in a way that plays to Tehran’s distinct advantage. Such threats could not be easily dismissed because Tehran
knows that it can easily offer its highly valued contracts to other foreign
contractors, notably Russian or Chinese businesses, that are more willing to
sacrifice their ties, if they have any at all, with the United States.
A glance at Ahmadinejad’s political manifesto and personal background does suggest an inflexible
individual who may be inclined to force such a stark choice on the outside
world. For when on 24 June 2005 the 49-year-old presidential candidate won the
second round of voting in the electoral race by promising a pure
‘Islamic government’, he was well qualified to make such claims. Having served in the Revolutionary
Guard during the war with Iraq, subsequently worked as a trusted regime
official in a variety of positions and acted as a conservative mayor of Tehran
after the municipal elections of 2003, Ahmadinejad is part of a paternalistic,
xenophobic and economically interventionist tradition that contrasts sharply
with the easy pragmatism that most economists think Iran needs so badly.
Evidence of this inflexibility of attitude emerged within a few weeks of taking
up office in August, when his economic spokesman announced a reduction of
interest rates that was opposed by independent economists and which respected
analysts, such as Amir Mohebian, a well-known Iranian newspaper columnist,
thought would help the already bloated state sector to grow even more .[48]
Within weeks of becoming prime minister, Ahma-dinejad had also given the outside
world a clue that he would take the hardline, uncompromising stance towards
international investors that may in future force them to make a stark choice
between Washington and Tehran. In a clear warning to the EU, he told the
Iranian parliament in August that
‘economic ties are not irrelevant to political ties’ especially with ‘hostile’ countries that ‘fail to recognize Iran’s legitimate rights’. Industry observers also believed that Ahmadinejad was unhappy about some of
the links forged with Western companies under the previous government, led by
the much more moderate Mohammad Khatami, and the new president confirmed this
hardline attitude by cancelling a drilling contract struck with Kish Oriental,
which is linked to the giant US firm Halliburton, after an Iranian court
accepted charges that Kish Oriental officials had bribed Iranian workers.
The net result of all these different pressures — some that are internal to Iran, others either a consequence of American
perceptions of Iran or else born of a sharply increasing global demand for oil
— is the creation of a new challenge to American power. On the one hand,
Washington is trying to pull its allies, non-aligned countries and rivals away
from Tehran, while on the other their growing energy needs are pushing these
countries towards it.
Of course this statement is one that requires some careful elucidation. What
kind of
‘power’, in any case, is it that is now in real danger of being eroded?
US ‘POWER’
‘Power’, as one leading American writer on international affairs, Joseph Nye, has
defined it, is
‘the ability to effect the outcomes you want, and if necessary, to change the
behaviour of others to make this happen
’.[49] This ‘ability’ can, of course, manifest itself in different ways, and it is clear that Iran is
not currently posing any challenge to America
’s ‘soft power’ which Nye identifies when he writes that ‘a country may obtain the outcomes it wants in world politics because other
countries want to follow it, admiring its values, emulating its example,
aspiring to its level of prosperity and openness
‘.[50] Other than in the Shi-ite areas of Iraq, there are few places in the world
where people are clamouring for the strict Islamic values that were championed
by the Islamic revolution in 1979 and which have since been resurrected,
symbolically at least, by Mahmoud Ahmadinejad. By contrast there are many young
people inside Iran who consciously emulate the fashions and manners, and admire
the perceived lifestyle and values, that are held by many ordinary Americans:
‘if the Americans opened a visa office in Tehran then there would be a queue ten
miles long outside,
’ one Iran-based European diplomat once told me, ‘and that in itself would be enough to bring the regime crashing down’.
Iran instead poses a challenge to America’s ‘hard power’, which Nye defines as a country’s ability to offer rewards and make threats. This type of power was
traditionally always measured by a country
’s capacity to make war on its enemies, a capacity that was in turn dependent on
factors such as its population, territory, natural resources, economic
strength, military force and political stability. In the contemporary world,
however, he argues that
‘economic power has become more important than in the past, both because of the
relative increase in the costliness of force and because economic objectives
loom large in the values of post-industrial societies
’. ‘Hard power’
In every respect, the United States exerts considerable ‘hard power’ over other nations, giving them very strong reasons to follow its lead. It has,
after all, a vast economic strength that flexes its muscle over other countries
in a number of ways, not least because it generates resources that enable
Washington to grant huge subsidies or loans, with political strings typically
attached, if it so chooses. When economies like those of Indonesia, Brazil and
Malaysia have approached a point of collapse, it is the United States above all
that has played a fundamental role in rescuing them, often making emergency
loans conditional on the implementation of domestic programmes of privatization
and deregulation. It was the promise of economic aid to Serbia
’s devastated economy, for example, that in 2000 persuaded the government in
Belgrade to change course and hand its leader, Slobodan Milo
ševi, over to The Hague tribunal, while the leaders of Pakistan currently have to
weigh the $700 million of aid they receive from the United States with the
value of their trade with Tehran. The promise of material aid may not always
prove irresistible
— in March 2003 Washington’s promise of a $15 billion aid package in return for support for the Iraq war
could not tempt the Ankara parliament to allow the deployment on Turkish soil
of 62,000 US troops and 250 planes[51]— but it is for most parties a very alluring one.
Of course the economic and financial benefits offered by Washington cannot just
be weighed in narrow terms of aid and subsidy. This is partly because America
’s foreign aid budget is no longer as voluminous as it once was. While in 1948,
for example, this budget amounted to around 6 per cent of its GDP, the figure
today stands at only 0.17 per cent, or less than $1 7 billion. Even this figure
is misleading because, taking aside military assistance and the $3 billion
spent each year on supporting Israel, the real figure is much closer to an
annual $8 billion.[52] In any event the benefits bestowed by such foreign aid
are probably insignificant compared with those offered by trade with and
investment from a country whose GDP in 2004 was measured at $10 trillion,
making up nearly 30 per cent of the global economy. For any political enmity
with Washington means the possible imposition of economic sanctions that can
disrupt the flow of capital into and out of the United States, with perhaps
disastrous consequences for the particular business or country involved.
The crucial importance of American trade and investment to other countries is
well measured by its role as an inducement in alleviating mistrust and tension
in global hotspots. In 1994, for example, North Korea agreed to halt its
defiant bid to develop nuclear weapons in return for an American promise not
only to arrange the supply of huge quantities of oil but also to bring down
trade and investment barriers and restore
‘the full normalization of political and economic relations’ between the two countries. These relations had not been restored by 2001,
however, as suspicions grew that Pyongyang had resumed its nuclear programme,
but in September 2005 similar promises of economic ties between North Korea and
the United States helped to broker a new agreement.
Also more important than Washington’s foreign aid budget is its strong influence over international financial
bodies, most notably the World Bank and the International Monetary Fund. To a
large degree this influence is a consequence of American economic power: the US
contributes more than any other country to the IMF, which receives 17.5 per
cent of its funding from Washington, while by a long-standing, informal
agreement the president of the World Bank is an American national, who is
nominated by the Bank
’s US executive director. The importance of American influence on these bodies
became clear during the Suez crisis in November 1956, for example, when the
Eisenhower administration effectively imposed economic sanctions on Britain by
using its influence in the IMF to block London
’s desperate request for economic assistance. Other international bodies and
organizations over which, despite all their boasts of independence from outside
pressure, the US exerts a strong influence are the United Nations and OPEC. In
March 1999 OPEC
’s decision to raise production quotas perhaps partly reflected a strong American
bid to influence its decisions: on
11 April, after he had made several high-profile visits to oil ministers of key
OPEC countries before their conference in Vienna, and subsequently made
repeated phone calls during their quota negotiations, US Energy Secretary Bill
Richardson had claimed that
‘the administration’s diplomatic efforts should result in an immediate production increase of 1.8
million barrels per day
‘.[53]
Washington also has a strong influence over the United Nations, and India’s ambition to gain a permanent seat in the United Nations Security Council helps
explain its recent efforts to establish new ties with the United States.
Washington had reportedly already sought to persuade New Delhi to deploy Indian
troops to Iraq in return for this representation on the Security Council.[54]
A country’s wealth is also both a symptom and a cause of its technological advances, since
it is able to fund research into developments that, when discovered, also yield
a competitive edge and help to sustain its economic pre-eminence. One country
that has a clear head start in developing new areas of information technology,
for example, can also establish itself in a global marketplace more quickly
than its competitors, whose late arrival can be extremely difficult to recoup.
So a government that sacrifices its ties with Washington can also risk falling
behind with the rapid pace of technological advance that the United States has
often set. When, in the winter of 2004, US Congress sought to deter the EU from
lifting a proposed arms embargo on China, some members proposed placing
restrictions on the transfer of US technology to their European allies, as well
as other limitations and constraints
‘.[55] As one Congressman put it, ‘in the mad dash to secure lucrative Chinese contracts, more thoughtful Europeans
might want to assess the potential damage to transatlantic defence cooperation
’. Such threats helped to ensure that by March 2005 the EU had abandoned any such
plans.
Technological advances also yield a clear advantage on the battlefield, and any
country that falls behind technologically can catch up, if at all, only at very
great cost. In the post-war period, for example, France struggled to develop
its own nuclear deterrent while Britain, enjoying close ties with Washington
from 1957, shared US technical information on the production of nuclear bombs
and bought the Polaris missile at a special knock-down price. Today the US-led
campaigns in Kosovo, Iraq and Afghanistan have illustrated the importance of
keeping pace with such advances, having demonstrated the might and
sophistication of American military power, with its dependency on computers,
satellites and
‘smart’ weapons, as well as its limitations and vulnerabilities. Of particular
importance in this regard is America
’s contemporary role as a pivot on which the traffic of global communications
rests: around 75 per cent of global internet traffic is today switched through
the United States and handled at some point by US carriers, a legacy of the
origins of the internet, which began as the internal network of the Defense
Department
’s Advanced Research Projects Agency (ARPA) .[56] The security of many countries
in this regard is to some degree dependent on the United States, despite
unsuccessful efforts by the Iranian government in November 2005 to transfer
control of the internet into the hands of an independent UN body.
The importance of military technology in buying political support emerged in the
summer of 2005 when Washington used its nuclear know-how as a bargaining chip
to win favour in New Delhi (see Chapter 3). Although a political row ensued in
Washington and elsewhere, the Bush administration offered the Indian government
sensitive nuclear technology and highly sophisticated nuclear-capable weapons
systems that would allow New Delhi to deter any possible Chinese military
attacks comparable to those that were launched on India
’s northern borders during the Sino-Indian war of 1962. It is from just such
military as well as civilian technology that any US ally risks being alienated
if it refuses to toe the Washington line. This was the price that France risked
paying when in the run-up to the Iraq war in 2003 its government refused to
support frantic British and American attempts to secure a second United Nations
resolution against Iraq, as President Jacques Chirac announced that France
would vote no,
‘whatever the circumstances, because we do not think war is necessary to achieve
the goal we
’ve established’ and because waging war without UN backing would set a ‘dangerous’ precedent.
American military strength is of course an issue not just of sophistication but
of the sheer numbers that the country can afford to maintain, and it was this
capacity to sustain a protracted war effort that Eisenhower had in mind when he
once remarked that
‘the foundation of military strength is economic strength ... a bankrupt America
is more the Soviet goal than an America conquered on the field of battle
‘.[57] It is because of the size of the US military that, since the time of its
entry into the Second World War in 1942, no country in the world, other than
the neutral, could be indifferent to American influence. Even after the demise
of the Soviet Union in the early 1990s, and with it the end of a perceived
threat of Soviet expansion, no government could afford either to provoke
America
’s enmity or to overlook the military and political benefits that it might reap
from an alliance with a country that in 2004 spent $437 billion, or roughly
half of all military spending around the world, and which had proportionately
spent even more during the Cold War.
In some respects this is less true today than before. In raw material terms, the
US military has looked much more vulnerable and overstretched ever since the
invasion of Iraq re-exposed its susceptibility to protracted guerrilla war and
made any large-scale intervention in the world both militarily impossible and
politically unacceptable to an American public that has had to bear large and
mounting casualties. Moreover since 2001 any close alliance with the United
States has also brought new dangers and risks by making the other party a
target for Al Qaeda terrorists: the perpetrators of the Madrid train bombings
of 2004 and the London tube bombings in July 2005, for example, claimed to be
‘retaliating’ for their governments’ support of the American invasion of Iraq. Finally some countries are now able
to look away from Washington and turn instead towards rival defensive and
political blocs that have emerged since the end of the Cold War, the most
obvious example being the member states of the European Union, which have
gradually forged a common defence policy over the past decade.
So in what ways, then, is America’s ‘power’, as defined in all these different ways, now being eroded by the Iranian
challenge?
HOW AMERICAN POWER IS BEING UNDERMINED
American power is already being undermined, or could perhaps one day be
challenged, by the influence of Iranian oil in a number of different ways that
lie outside the scope of this book. So although earlier on in this chapter the
point was made that the global dependency on oil puts out of the question any
suggestion of enforcing meaningful economic sanctions on Iran, this limits not
just American power over Iran but that of any other country that wants to
change the behaviour of any oil-producing state. Moreover while any UN
resolution against Iran would in all likelihood be vetoed by China
— and perhaps too by Russia — which is increasingly dependent on Iranian oil, this is clearly a reflection
not of any Iranian challenge but of the weaknesses of the voting system in the
UN Security Council, whose perceived inequities the Bush administration has
made efforts to reform: Beijing and Moscow had, after all, also vetoed American
moves to sanction North Korea in early 2003 after the Pyongyang regime expelled
international weapons inspectors and broke out of the Nuclear Non-Proliferation
Treaty.
Other possible Iranian challenges to Washington’s pre-eminence are too speculative to lie within this book’s ambit. When in July 2005 the head of the board of directors of the Stock
Exchange Council in Iran, Haidar Mo-stakhdemin Hosseini, said that the council
had agreed in principle to establish a new oil exchange on Kish Island that
would be the first of its kind in the Middle East, eyebrows were quickly
raised. Because this new body would deal only in euros, it seemed quite
possible that it might eventually start to challenge the market dominance of
the world
’s two existing financial exchanges — London’s International Petroleum Exchange and New York’s Mercantile Exchange — which are both owned by US companies. Some experts reckoned that if vast
quantities of oil sales were ever traded in euros, then global demand for
dollars would wane, creating big trouble for a heavily indebted American
economy that greatly depends on such a demand.
‘At this point it’s really to poke their finger in the eye of the US,’ an analyst at Columbia University told one American newspaper, ‘and certainly part of their idea is to weaken American economic hegemony.’[58] But most analysts are agreed that such a scenario would present only a very
long-term threat and presents no short or even intermediate-term challenge to
American interests, even if the exchange, which was licensed in May 2006, soon
opens. By contrast, Washington
’s international influence is already being challenged by the impact of Iranian
oil in three other ways.
On the one hand, Washington’s strategic rivals, notably China, are being economically fuelled by Iranian
resources, which are therefore augmenting the challenge to US interests posed
by these countries. What is more, within Iran the foreign exchange earnings of
oil and gas exports are buttressing the Iranian regime, a chief US rival and
enemy in the Middle East, thus allowing it to pursue a nuclear programme, one
that is widely deemed to hide a covert weapons programme, and to buy off its
political enemies.
NOTES
INTRODUCTION
[1] Edward Gibbon, The Decline and Fall of the Roman Empire (London and New
York: Penguin, 1978), chapter VIII, p 260.
[3] See generally Michael Klare, Blood and Oil: How America’s Thirst for Petrol is Killing Us (London: Hamish Hamilton, 2005).
[4] Such as Evo Morales’ movement in Bolivia. Chavez has also blocked US-led political initiatives. In
November 2005, for example, he was a leading light in the effort to block the
US-led proposal to restart talks on the Free Trade Area of the Americas (FTAA).
CHAPTER 1. Why Iran’s Natural Resources Matter
[2] Michael B. Stoff, Oil, War and American Security: The Search for a National Policy on Foreign Oil
1941-1947 (New Haven: Yale University Press, 1980) pp. 48-51, 58-9.
[4] ‘Iran’s zealot in chief does Bush a favour’, Sunday Times, 30 October 2005. Ahmadinejad had made a speech a few days before
calling for the annihilation of the Jewish state.
[5] ‘Proven reserves’ include only those reserves that can be exploited with currently available
technology at conservatively projected prices.
‘Recoverable reserves’, meanwhile, are not necessarily ‘proven’, but are expected to meet that standard in the foreseeable future. What is and
is not
‘recoverable’ is always inherently uncertain but all the more so in Iran, which has suffered
from the effects of international sanctions and where the extent of
‘recoverability’ is therefore even more unclear.
[6] An analyst for Barclays Capital quoted in ‘How much oil do we really have’, BBC News, 1 5 July 2005.
[7] Such as the Oil and Gas Journal, which quotes this upward figure in its
Worldwide Report of 20 December 2004.
[12] These Executive Orders were pursuant to the International Security and
Development Cooperation Act and the International Emergency Economic Powers
Act.
[13] On 17 March 2000 Secretary of State Madeleine Albright announced that
sanctions against Iran would be eased to allow these products to be imported.
The change was implemented through amendments to the Iranian Transactions
Regulations.
[17] See Stephen Kinzer’s account of the 1953 coup in All the Shah’s Men: An American Coup and the Roots of Middle East Terror (New York: John
Wiley, 2003).
[18] William E. Griffith, ‘Iran’s foreign policy in the Pahlavi era’, in George Lenczowski (ed), Iran under the Pahlavis (Stanford, California:
Hoover Institution Press, 1978) p 375.
[19] This was introduced into the House of Representatives as legislation number
H.R. 282 and into the Senate as S.333.
[23] On 2 August 2005 the National Intelligence Estimate projected that Iran was
about a decade away from manufacturing HEU. On 6 September 2005 Gary Samore of
the IISS published a report, Iran
’s Strategic Weapons Programme: A Net Assessment, arguing that Iran was still ‘at least several years’ from reaching the nuclear threshold.
[26] On 22 October 2005 IRNA quoted an analyst for the US-based Jamestown
Foundation, Mahan Abedin, as saying that the UK was using its allegations of
Iranian involvement in southern Iraq as a
‘smokescreen’ for its plight in Basra.
[27] ‘President Bush renews anti-Iranian sanctions’, Iran Press Service, Washington DC, 14 March 2003.
[29] Cited in Doris Leblond, ‘IEA: $16 trillion in energy investment needed by 2030’, Oil and Gas Journal, 20 November 2003, p 37.
[37]An ABC/Washington Post poll, 6-9 April 2006, showed that 74 per cent of
Americans were unhappy on this score.
[47] Middle Eastern Economic Survey, 24 January 2005. This was a survey of representatives of Western international
oil companies and banks in Iran and was taken shortly after The New Yorker
published Seymour Hersch
’s article claiming that US forces were already inside Iran, preparing for
possible military strikes.
[52] Curt Tarnoff and Larry Nowels, ‘Foreign Aid: An Introductory Overview of US Programs and Policy’, Congressional Research Service Report, updated 6 April 2001, p 23.
[58] ‘Iran’s oil gambit and potential affront to the US’, Christian Science Monitor, 30 August 2005.
Published in 2007 by I B .Tauris & Co. Ltd 6 Salem Road, London W2 4BU 175 Fifth Avenue, New York, NY 10010
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