Stopping Iran

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The prospect of a nuclear-armed Iran is one of the nightmares facing the Middle East today. Iran has been working overtime to produce enough nuclear fuel for its first bomb, increasing the number of centrifuges needed to convert yellowcake to uranium hexaflouride gas, and according to the International Atomic Energy Agency it may have as many as 3,000 centrifuges up and running this summer. By the IAEA's estimate that would be enough for Iran to have completed a nuclear weapon in two years time. That means the international community does not have much time to prevent the outbreak of a nuclear arms race in the Middle East — the most volatile, energy-rich region of the world.

Probably the most powerful deterrent against international action, be it military intervention or sanctions, is Iran's ability to wreak havoc with world energy markets. As one of the Middle East's most oil-rich countries, Iran has the ability to deeply affect the world's oil supply, either by ceasing production itself or blocking off the Strait of Hormuz, which would cut off tanker traffic from other major Middle Eastern oil producers as well. Needless to say, Iran would be destroying its own economy by such a move, but President Mahmoud Ahmadinejad may be fanatical enough in his pursuit of the bomb to do it.

So, how much leverage does Iran actually have? Analysts at the Heritage Foundation asked themselves this question back in December. To find the answer, they constructed a war-game scenario of an Iranian-induced world oil crisis, and entered the resulting date into a model of the U.S. economy run by the highly respected economic forecaster Global Insight. The results will be published at a meeting this morning at the Heritage Foundation, and the good news is that Iran's power to harm at least the U.S. economy is far less than is often predicted.

The scenario on which the game was based is highly realistic. It goes as follows: After the U.N. Security Council finally agrees to significant sanctions on Iran, the Islamic Republic pulls out of the nuclear Non-Proliferation Treaty and conducts a nuclear test. The United States bombs Iran's nuclear sites and airbases in retaliation. Iran institutes an embargo on the United States and any country that does not condemn U.S. actions, and sinks an oil tanker in the Strait of Hormuz. Venezuela acts to impose an embargo on the United States in sympathy with Iran.

Players in the war game took several steps that mitigated the resulting energy shock within weeks. Quick military action reopened the Strait of Hormuz, the U.S. government employed the Strategic Petroleum Reserve and Congress lifted tariffs on ethanol and temporarily eased regulatory burdens. In addition, legislation to open up ANWR and offshore reserves west of Florida was considered.

Even in the worst-case scenario — when the oil shock would send prices of crude to $135 per barrel with the resulting loss of one million U.S. jobs — these relatively modest government actions all but nullified the crisis within six weeks. The resulting increase in the price of crude oil would be a mere $12 per barrel and there would be no job loss. Real U.S. GDP would remain at baseline level and there would be no change in disposable personal income. The lesson clearly is that U.S. government actions have as much to do with the economic consequences of an oil shock as anything else, or even more.

In other words, while Iran does hold a set of picture cards in this energy game, it may not hold the winning hand if we play our own cards correctly. Furthermore, there is no doubt that sanctions already in place, imperfect though they are, have done damage to the Iranian economy, and further sanctions cutting off the supply of equipment needed to keep the Iranian oil fields producing at capacity would be crippling. Iraq had a very young population, high unemployment rates and practically no other economic assets beyond its energy sector.

The findings of the energy study will importantly leave American policy-makers and planners with a much wider array of policy choices than if severe damage and economic recession had been the consequences of taking action against Iran to stop a coming nuclear crisis. That's the good news for us — and the not-so-good news for the Iranian regime.