Sanctions for Iran a Tricky Proposition

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With Tehran making it clear that it won't curtail its nuclear program, the country faces possible U.N.-levied sanctions. Tehran seems to be betting that it can survive sanctions because of its vast oil reserves — and oil prices that are hovering around $70 a barrel. It also has the support of countries like Russia and China.

MELISSA BLOCK, host:

The prospect of sanctions being imposed on Iran is enormously complicated by the fact that Iran is the world's fourth-leading oil producer. Many countries are dependent on Iranian oil and a disruption of oil flows from Iran would have severe effects on the world economy. The Iranian government understands this and has threatened to respond to even modest sanctions by cutting off oil exports.

NPR's Tom Gjelten reports.

TOM GJELTEN reporting:

In theory the way to hurt Iran economically would be to slap international sanctions on its oil trade. The country exports two and a half million barrels of oil per day. The government gets 65 percent of its revenue from oil sales. That money is used to subsidize wages, social spending and cheap gasoline for the Iranian population. Losing that income could be devastating.

But Gal Luft of the Institute for Analysis of Global Security says the world right now simply cannot afford to do without Iranian oil.

Mr. GAL LUFT (Institute for Analysis of Global Security): The current global oil market is so tight nowadays that every country that produces oil is important, particularly a country like Iran. The global oil market cannot really survive Iran getting off the market for an extended period of time without major economic consequence.

GJELTEN: Luft says that without Iranian oil in the market the supply/demand imbalance could push oil prices above $100 a barrel. It's in all likelihood a moot question. China and Russia, both permanent members of the U.N. Security Council, have already made clear they would not allow oil sanctions against Iran.

Resistance could come from U.S. allies as well. The biggest importers of Iran oil are Japan and Western Europe. Gal Luft points out that Japan, in fact, has been courting a relationship with Iran as an oil producer for a long time.

Mr. LUFT: The Japanese have invested a significant amount of money over the past several years in developing oil fields in Iran and they feel that if we go down this sanction route, their investment will be in jeopardy.

GJELTEN: The Bush administration and its European allies will next week consider other sanctions against Iran that would not impact its energy producing sector. But Iranian officials earlier this month warned that they might consider using what they call their oil weapon in retaliation for sanctions imposed against them.

Even a limited suspension of Iran's shipments could have a major effect on the world economy. Daniel Yergin in chairman of Cambridge Energy Research Associates.

Mr. DANIEL YERGIN (Cambridge Energy Research Associates): The debate now is whether Iran would use its oil as a weapon in the face of sanctions and I think the view currently is probably not. If a crisis escalated into some kind of military confrontation, then it's a different game and all bets are off.

GJELTEN: Yergin makes the point that there are other ways that Iran could use this oil weapon, some of which would not even require the government to reduce its exports.

Mr. YERGIN: Over the past several months we've seen that when Iranian leaders make provocative statements and spook the oil market, the price of oil goes up $5 a barrel. In a tight world oil market, words can have a big impact on the price and we've seen that since the beginning of the year with Iran.

GJELTEN: The reason words can have a big impact on the world market is that a significant portion of the high current oil price includes what experts call a risk premium, the fear that political instability or war could jeopardize oil flows in the future and force the price of oil higher in the word market. Provocative words contribute to this effect.

And yet the world oil price has actually gone down in the last two weeks. It's as much as $10 a barrel below its July high. What does that mean? Edward Morse, chief energy economist at Lehman Brothers, says it's because oil traders don't believe sanctions are going to happen.

Mr. EDWARD MORSE (Lehman Brothers): It seems clear to me that the oil market has discounted any immediate impact of the Iranian situation on oil prices. I don't think anyone at this point thinks sanctions are likely to be adopted in the short run or that the Iranians are going to take any action.

figuring that the flow or Iranian oil is likely to remain fairly stable.

Tom Gjelten, NPR News, Washington.

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