How to Put the Squeeze on Iran
Nov 24, 2008 | Orde F. Kittrie
By Orde F. Kittrie
If Barack Obama is to persuade Iran to negotiate away its illegal nuclear weapons program, he will first need to generate more leverage than what the Bush Administration is leaving him with. The current UN sanctions have proven too weak to dissuade Teheran’s leaders, and Russia and China seem determined to keep those sanctions weak. Meanwhile, the regime continues to insist there are no incentives in exchange for which it would halt or even limit its nuclear work.
However, Teheran has an economic Achilles’ heel – its extraordinarily heavy dependence on imported gasoline. This dependence could be used by the United States to peacefully create decisive leverage over the Islamic Republic.
Iranian oil wells produce far more petroleum (crude oil) than Iran needs. Yet, remarkably for a country investing so much in nuclear power, Iran has not developed sufficient capacity to refine that crude oil into gasoline and diesel fuel. As a result, it must import some 40% of the gasoline it needs for internal consumption.
In recent months, Iran has, according to the respected trade publication International Oil Daily and other sources including the US government, purchased nearly all of this gasoline from just five companies, four of them European: The Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries. If these companies stopped supplying Iran, the Iranians could replace only some of what they needed from other suppliers – and at a significantly higher price. Neither Russia nor China could serve as alternative suppliers. Both are themselves also heavily dependent on imports of the type of gasoline Iran needs.
Were these companies to stop supplying gasoline to Iran, the world-wide price of oil would be unaffected – the companies would simply sell to other buyers. But the impact on Iran would be substantial.
When Teheran attempted to ration gasoline during the summer of 2007, violent protests forced the regime to back down. Cutting off gasoline sales to Iran, or even a significant reduction, could have an even more dramatic effect.
In the US Congress, there is already bipartisan support for peacefully cutting off gasoline sales to Iran until it stops its illicit nuclear activities. Barack Obama, John McCain and the House of Representatives have all declared their support.
On June 4 of this year, for example, Senator Obama said at a speech in Washington, DC: “We should work with Europe, Japan and the Gulf states to find every avenue outside the UN to isolate the Iranian regime – from cutting off loan guarantees and expanding financial sanctions, to banning the export of refined petroleum to Iran.”
He repeated this sentiment during the presidential candidates’ debate on Oct. 7: “Iran right now imports gasoline . . . if we can prevent them from importing the gasoline that they need . . . that starts changing their cost-benefit analysis.”
How do we stop the gasoline from flowing? The Bush Administration has reportedly never asked the Swiss, Dutch, French, British or Indian governments to stop gasoline sales to Iran by the companies headquartered within their borders. An Obama Administration should make this request, and do the same with other governments if other companies try to sell gasoline to Iran.
But the US also has significant direct leverage over the companies that currently supply most of Iran’s imported gasoline.
Consider India’s Reliance Industries which, according to International Oil Daily, “re-emerged as a major supplier of gasoline to Iran” in July after taking a break for several months. Reliance reportedly “entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery.” One hundred thousand tons represents some 10% of Iran’s total monthly gasoline needs.
The Jamnagar refinery is heavily supported by US taxpayer dollars. In May 2007, the US Export-Import Bank (Ex-Im), a government agency that assists in financing the export of US goods and services, announced a US$500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, Ex-Im announced a new US$400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery.
Or consider the Swiss firm Vitol. According to International Oil Daily, Vitol “over the past few years has accounted for around 60% of the gasoline shipped to Iran.” Vitol is currently building a US$100 million terminal in Port Canaveral, Florida.
Last year, when Minnesota Governor Tim Pawlenty discovered that an Indian company, Essar, was seeking to both invest some US$1.6 billion in Minnesota and invest over US$5 billion in building a refinery in Iran, he put Essar to a choice. Gov. Pawlenty threatened to block state infrastructure subsidies and perhaps even construction permits for the Minnesota purchase unless Essar withdrew from the Iranian investment. Essar promptly withdrew from the Iranian investment.
Florida officials could consider taking a similar stance with Vitol.
The Minnesota example is not the only precedent. US outreach to foreign banks and to oil companies considering investing in Iran’s energy sector has reportedly convinced more than 80 banks and several major potential oil-field investors to cease all or some of their business with Iran. Among them: Germany’s two largest banks (Deutsche Bank and Commerzbank), London-based HSBC, Credit Suisse, Norwegian energy company StatoilHydro, and Royal Dutch Shell.
A sustained initiative may be able to convince most or all current and potential suppliers that the profits to be gained from continuing to sell gasoline to Iran will be dwarfed by the lost loan guarantees and subsidies and foregone profits they will incur in the US.
In early November, a group of 60 Iranian economists called for the regime to drastically change course, saying that President Mahmoud Ahmadinejad’s “tension-creating” foreign policy has “scared off foreign investment and inflicted heavy damage on the economy.” The economists said the current sanctions, as weak as they are, have cost Iran billions of dollars by forcing it to use middlemen for exports and imports. Halting Iran’s gasoline supply could contribute to reaching a tipping point – at which economic pressures and protests convince the regime its illicit nuclear program poses too great a risk to its grip over the Iranian people.
If the federal and key state governments in the US were to make it their goal to achieve a halt by companies selling gasoline to Iran, it could be a game-changer. It may be our best remaining hope for peacefully convincing Iran to desist from developing nuclear weapons.
Orde Kittrie is a professor of law at Arizona State University and a fellow at the Foundation for Defence of Democracies. He previously worked for 11 years at the US Department of State, including as a specialist on nuclear nonproliferation and sanctions. Reprinted from the Wall Street Journal. © Dow Jones, reprinted by permission, all rights reserved.