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Sanctions approved for Iran

Tom Whipple (ed), Peak Oil Review (ASPO)
The UN Security Council on Saturday unanimously approved sanctions intended to curb Iran’s nuclear program. The vote ended months of negotiations over how severe the restrictions should be.

The resolution, prepared by Germany and the Security Council’s five permanent members – the United States, Britain, France, Russia and China – bans the export to Iran of materials and technology used in uranium enrichment, reprocessing and ballistic missiles.

On Sunday, Iran condemned the U.N. sanctions resolution as “a piece of torn paper” that would not scare Tehran and vowed to accelerate uranium enrichment work immediately. Tehran is also “reviewing its cooperation” with UN’s IAEA as required by the non-proliferation treaty.

At the insistence of Russia and China who have extensive commercial relations with Iran, the sanctions were repeatedly watered down to the point where they are unlikely to have much effect. The path ahead is less clear. The US says that harsher penalties will follow if Iran fails to halt its nuclear program within 60 days. Given how long it took to work out the relatively mild sanctions just passed, negotiations to impose “harsher penalties” are likely to be overtaken by other events before an agreement is reached at the UN.

In the meantime, Iran’s oil minister admitted last week that Tehran was having trouble financing oil projects, a rare acknowledgment of the economic cost of its nuclear dispute.
(26 Dec 2006)
Login is required to accessed the Peak Oil Review. The entire piece on Iran is reproduced here.

Analysis says Iran’s oil revenue is plummeting

Barry Schweid, The Associated Press via LA Times
WASHINGTON — Iran is suffering a staggering decline in revenue from its oil exports, and if the trend continues income could virtually disappear by 2015, according to an analysis published Monday in a journal of the National Academy of Sciences.

Iran’s economic woes could make the country unstable and vulnerable, with its oil industry crippled, Roger Stern, an economic geographer at Johns Hopkins University, said in the report and in an interview.

…Stern’s analysis, which appears in this week’s edition of the Proceedings of the National Academy of Sciences, supports U.S. and European suspicions that Iran is trying to develop nuclear weapons in violation of international understandings. But, Stern says, there could be merit to Iran’s assertion that it needs nuclear power for civilian purposes “as badly as it claims.”

He said oil production is declining and both gas and oil are being sold domestically at highly subsidized rates. At the same time, Iran is neglecting to reinvest in its oil production.

“With an explosive demand at home and poor management, the appeal of nuclear power, financed by Russia, could fill a real need for production of more electricity.”

…If the U.S. can “hold its breath” for a few years it may find Iran a much more conciliatory country, he said. And that, Stern said, is good reason to belay any instinct to take on Iran militarily
(26 Dec 2006)
Also posted at Yahoo!Finance.
The next item (below) is the report mentioned in the article.

The Iranian petroleum crisis and United States national security
Roger Stern, National Academy of Sciences

The U.S. case against Iran is based on Iran’s deceptions regarding nuclear weapons development. This case is buttressed by assertions that a state so petroleum-rich cannot need nuclear power to preserve exports, as Iran claims. The U.S. infers, therefore, that Iran’s entire nuclear technology program must pertain to weapons development.

However, some industry analysts project an Irani oil export decline [e.g., Clark JR (2005) Oil Gas J 103(18):34–39]. If such a decline is occurring, Iran’s claim to need nuclear power could be genuine. Because Iran’s government relies on monopoly proceeds from oil exports for most revenue, it could become politically vulnerable if exports decline.

Here, we survey the political economy of Irani petroleum for evidence of this decline. We define Iran’s export decline rate (edr) as its summed rates of depletion and domestic demand growth, which we find equals 10–12%. We estimate marginal cost per barrel for additions to Irani production capacity, from which we derive the ‘‘standstill’’ investment required to offset edr.

We then compare the standstill investment to actual investment, which has been inadequate to offset edr.

Even if a relatively optimistic schedule of future capacity addition is met, the ratio of 2011 to 2006 exports will be only 0.40–0.52. A more probable scenario is that, absent some change in Irani policy, this ratio will be 0.33–0.46 with exports declining to zero by 2014– 2015.

Energy subsidies, hostility to foreign investment, and inefficiencies of its state-planned economy underlie Iran’s problem, which has no relation to ‘‘peak oil.’’

[The article conludes with aggressive recommendations for a “price attack” on Iran. -BA]

Iran’s petroleum crisis is a strategic opportunity. Unless price increases, export erosion seems likely to reduce the regime’s monopoly rent stream. Such a dynamic seems propitious for some policy to compound the regime’s self-inflicted problems. A nonviolent, economic attack on monopoly price is such a policy.

A price attack implies measures that would erode market power and hence reduce price. Market power exerted through OPEC investment restraint is responsible for most of the difference between the $4- to $10-per-barrel competitive price and market price, which has been much higher for most of the past 33 years. This difference underwrites the Islamic Republic, the need for U.S. force projection in the Gulf, and many other security problems (4). An analogous target in a military campaign would be an adversary’s industrial capacity. Market power should be understood in this way, as inseparable from the threats it underwrites but also more vulnerable.

A price attack implies forced adoption of fuel-efficient technology by importing states. The resulting fuel efficiency (f-e) improvement would have to reduce demand by enough to force cartel producers to defend price, which they would do by reducing supply. Equitable sharing of supply cuts is an inherent problem for any cartel that lacks an enforcement mechanism for market sharing agreements.

A price attack would exploit this weakness by forcing OPEC states that do not cheat against declining quotas to absorb most of the supply reduction necessitated by importer f-e improvement. This is what happened to Saudi Arabia between 1981 and 1985 as price fell. Other cartel states declined to match Saudi cuts, choosing instead to get as much revenue as they could while they could. Saudi net oil revenue fell almost to zero as it cut production ever further in defense of price. Finally nearly broke, the Saudis initiated a dramatic production increase. This recaptured lost market share but drove down price further, to $10 (2005$). A collapse like this is the goal of a price attack. If Saudi Arabia were forced to reprise its 1980s behavior, Iran’s revenues would collapse. Unlike Saudi Arabia, Iran cannot increase production to compensate for falling price.

The most efficient policies to force f-e would be fuel taxation, cap and trade mechanisms (for horsepower, emissions, or miles traveled), or fleet f-e standards. Given what appears to be a decreasing price elasticity of gasoline demand in the U.S., some combination of standards and taxation might be most successful. The burden of new taxation could be partially offset by reductions to payroll or other taxes. Although the optimal price attack policy cannot be known, present U.S. energy policy is nonoptimal in that it ignores price. Energy policy has been adopted in response to the imaginary problem of oil dependence (4), which has reduced it to a quest for tax preferences by domestic producers….
(26 Dec 2006)
Green U.S. policies, but expressed in very hawkish terms. It’s odd to find such a political piece in a scientific journal, Proceedings of the National Academy of Sciences.

Even though this piece was released today, it is many months old. According to the abstract for the article, the article was received May 16, 2006 and approved October 31, 2006.

Controlling Iran’s Nuclear Program

Joseph Cirincione, Issues in Science and Technology
The country’s slow and indirect progress toward developing nuclear weapons cunningly skirts international nonproliferation rules. Careful diplomacy can stop Iran from achieving this destabilizing capability.

Joseph Cirincione ([email protected]) is the director for nonproliferation at the Carnegie Endowment for International Peace and the author of “Deadly Arsenals: Nuclear, Biological and Chemical Threats” (Carnegie Endowment, 2005).

(no date)

Background information from the National Academy of Sciences. -BA

Iran turns from dollar to euro in oil sales

Carl Mortished, Times (UK)
Iran is selling more of its oil for payment in euros than dollars as it seeks to shift its foreign currency reserves away from the depreciating currency of its political enemy, the United States.

The world’s fourth-biggest oil exporter has inserted a clause in its oil contracts allowing it to request payment in alternative currencies.

Gholanhossein Nozari, the managing director of National Iranian Oil Company, said that 57 per cent of Iran’s income from oil exports was now received in euros.

The move reflects a political desire for less reliance on the dollar, as well as a need to avoid further depreciation in currency reserves. Iran’s dollar holdings are thought to have fallen from 40 per cent of currency reserves to just a third.

Iran announced plans in 2004 to develop an Iranian oil bourse, a commodity exchange that would become a Middle Eastern rival to the major exchanges in New York, London and Singapore, which set benchmark oil prices.

The Iranian bourse would also challenge the petrodollar by setting oil prices in euros. However, there has been little progress in establishing the bourse, which failed to launch as planned last March.
(22 Dec 2006)
Contributor Marc writes:

This should no doubt add fuel to the anti-Iran rhetoric emanating from Washington and its closest allies. I expect the call for heavy sanctions will get louder, creating a split between the US and the EU. China and Russia will resist, and it should make for some interesting bedfellows all-around.