US Faces Dilemma in Targeting Iran's Oil

http://biz.yahoo.com/ap/071105/iran_targeting_oil.html?.v=1

US Faces Dilemma in Targeting Iran's Oil
Monday November 5, 4:01 pm ET
By Sebastian Abbot, Associated Press Writer
With Oil at $95 a Barrel, More Pressure on Iran's Oil Industry Poses Economic Risk for US, Too

CAIRO, Egypt (AP) -- With oil above $95 a barrel, there are limits to how much pressure the U.S. is willing to place on Iran's petroleum sector to influence a persistent nuclear standoff, analysts say.

ADVERTISEMENT
The dilemma is pretty clear for the world's largest energy consuming nation, which last week announced sanctions against several Iranian oil-services firms. Taking more aggressive action risks hurting America's economy, while enriching Iran's.

Washington is also limited by the reality that, even if it wanted to take a more bellicose stance, it can do little -- short of military action -- to hinder Iran's oil sales at a time when global demand is bulging.

"If Iran sees $100 a barrel oil, Iran is likely to conclude, and it may well be true, that no matter how severe the sanctions ... the regime could sneak by," said Matthew Levitt, a former U.S. Treasury Department terrorism expert, who is now with the Washington Institute for Near East Policy.

Levitt described the sanctions targeting Iranian oil-services firms linked to the country's powerful Revolutionary Guards as something of "a shot across the bow in the direction of the oil and gas industry." The Guards are an elite force Washington has linked to terrorism and missile proliferation.

Iran is the world's fourth-largest oil producer, exporting some 2.5 million barrels a day, according to the U.S. Energy Department.

Crude-oil futures traded Monday at $95.78 a barrel, declining 15 cents on the New York Mercantile Exchange.

Ultimately, the U.S. must find a way to target Iran's oil, some analysts say, because its exports generate billions of dollars in hard currency, providing Iranian President Mahmoud Ahmadinejad with strength to defy the international community. Ahmadinejad has continued to insist that Iran's nuclear program is peaceful and that the sanctions haven't hurt the country's economy.

"Unless there is a major land and naval blockade, there are always going to be buyers for Iranian oil," said Karim Sadjadpour, an Iran expert who works at the Washington-based Carnegie Endowment for International Peace.

The U.S. has long prohibited American firms, including major oil producers like Exxon Mobil Corp. and Chevron Corp., from doing business with Iran. And the U.S. does not buy oil directly from Iran. But oil is traded as a commodity on the world market. That means even if other countries followed America's boycott, Tehran would easily find alternative buyers, especially among European and Chinese companies that continue to pursue energy deals in Iran.

Sadjadpour said a more productive form of pressure against Iran would be taking action aimed at lowering world oil prices.

"If you can get oil down to $60, their (Iran's) calculation might change," he said.

But the U.S. has few ways to accomplish that. One short-term way might be to persuade Saudi Arabia to dramatically increase its output, Sadjadpour said. But Saudi Arabia's ability and willingness to take such a step are questionable, and there is no sign the U.S. has contemplated such a move.

Faced with such constraints, the U.S. chose what Levitt described as a "middle of the road option."

One of the firms targeted by the sanctions, Khatam al-Anbiya, has secured deals worth at least $7 billion in the oil, gas and transportation sectors among others, according to the U.S. Treasury. Levitt said the other eight companies listed by the U.S. are also linked to Iran's energy industry. These include Oriental Oil Kish and Ghorb Nooh, which have substantial contracts in the oil and gas sectors.

Washington hopes that associating these sanctioned oil-services companies with the Revolutionary Guards will persuade oil producers in other countries -- especially in China and Europe -- to cut off ties.

But even supporters of the new measures, including Levitt, acknowledge unilateral U.S. sanctions have no hope of changing Iran's behavior on their own.

All it does, Levitt said, is "create leverage for diplomacy."

Instead, U.S. officials apparently hope to use the oil and other sanctions to exploit Ahmadinejad's main weakness -- the rising criticism from a public angry over the country's poor economy and from politicians disillusioned by what they call the president's mismanagement.

Even some conservatives in Iran have expressed fears Ahmadinejad is pushing Iran into future trouble over the nuclear issue.

U.S. pressure against European banks to stop doing financial transactions with Iran has made it harder for Iranians to access the international financial system to do everything from get money from overseas relatives to finance imports.

The move has also slowed down much-needed foreign investment in Iran's oil industry. But many analysts say Iran could remedy that by offering better deal terms to international firms.

The U.S. also has been successful in leading two rounds of U.N. Security Council sanctions against Iran and is pushing for a third set if the country refuses to suspend uranium enrichment.

Saeed Laylaz, an economist in Tehran, shares the view that oil is key -- and so far, little touched. No amount of Western sanctions pressure will alter Ahmadinejad's stance as long as Iran can continue selling oil, Laylaz said.

"Because of the huge amounts of oil revenue, we can compensate for all the sanctions and much more," he said.