The European Union’s (EU) oil embargo and the EU and US’ new financial and banking sanctions against Iran, which were decreed on December 31, 2011, and January 23, 2012, respectively, open up the way to a wide range of possible scenarios. Unfortunately, none of the latter lead to the officially desired result, which is to bring Iran back to the “5+1” (Security Council Permanent Members + Germany) negotiating table in an attempt to settle the nuclear issue. On the other hand, the door is open to developments that could take very diverse and sometimes unexpected forms. Both sides are preparing for the confrontation. Iranian oil may be replaced, as Saudi Arabia has pledged to raise its output and meet all demand that oil buyers ask it for, within the limits of its production capacity. Its margin for raising output is around 2.7 million b/d and corresponds to the volume of oil that Iran currently exports. The EU has taken measures to provide financial aid to member countries such as Greece and Spain (which import Iranian crude oil at favorable conditions), which will stop purchasing Iranian crude oil. The US 5th Fleet has been mobilized in the Gulf, where it has been joined by British warships. And France has air force and naval bases in the region (Abu Dhabi and Djibouti).

For their part, the Iranians are prepared to live with lower oil export revenues if necessary. They have done away with a large part of their fuel subsidies and could, should the crisis worsen, lower these and other subsidies by more. They no longer depend on motor fuel imports. They have built up floating crude oil storage, either deliberately or because they have not managed to find a buyer. And they are implementing—albeit with great difficulty—new payment channels for their oil sales. They have diversified their exports of goods. Finally, Tehran has built up money reserves equivalent to one year of oil exports.

The fateful day is July 1, 2012, when the new US and European sanctions are to come fully into force. In the US, President Obama will give the green light then to the new sanctions voted by Congress in December 2011, if by July 1 the EIA provides proof that other oils can replace the one Iran exports. The action path to be taken by Saudi Arabia is therefore of utmost importance. It is in June-July 2012 that Abu Dhabi is to bring on-stream the oil pipeline that will enable it to ship up to 1.5 million b/d of crude oil to Fujairah, in the Indian Ocean, thus bypassing the Strait of Hormuz. The UAE currently export some 2 million b/d of oil. Iraq has an oil pipeline that enables it to ship limited volumes of oil to the Mediterranean, via Turkey. For its part, Saudi Arabia could transport to the Red Sea some 4.5 to 5 million b/d of crude oil produced on its east coast, thus avoiding Hormuz. The oil from Kuwait, Qatar and Iran completely depends on Hormuz for export, as does the LNG from Qatar and Abu Dhabi (up to 83 million tons/annum).

As all the pieces of the puzzle are being put in place in view of a possible tug of war, what are the possible scenarios? Logically, the Iranians will only try to shut Hormuz as a last resort, in the knowledge that if they did so, they would be crushed by the Western armed forces. On the other hand, they could sell their oil in countries that do not impose an embargo on them, by granting discounts and therefore replacing their sales to the Europeans, i.e. around 450,000 b/d. The system of communicating vases could work perfectly on the oil market. True, one of the risks would be that a downward price pattern could develop, if the Saudis were to seek to close the Iranians’ outlets by granting even bigger discounts than the latter. But such Saudi zeal is not likely. A symmetrical risk also exists: that in light of a drop in their sales, the Iranians should seek to preserve their revenues via a price hike fueled and sustained by tensions in the Gulf: a dangerous game. Another scenario is possible: opting to avoid either a military or oil-price confrontation, the Iranians could decide to live with lower oil exports and revenues, by calling on the sense of sacrifice of their people. How long would the Western countries be able to tolerate such a situation, since they suspect that the Iranians are embarking on a race against the clock in order to obtain military nuclear capacity?

The answer to this question not only depends on the information that the West will be able to gather on the Iranian nuclear program via the IAEA or other channels. It will also depend on the pressure applied by those in favor of military strikes on Iranian facilities: Israel and the most Conservative part of US public opinion. As the French Foreign Minister clearly pointed out last week, the EU resorted to imposing sanctions in order to dissuade supporters of military intervention from taking action by saying something like: just wait and you’ll see that the Iranians will crack up under pressure.

What is worrying in this affair is that the right questions are not being asked and therefore the right answers are not being provided. What is the West seeking? Simply to be sure that the Iranians obtain no nuclear military capability or also that they become more politically acceptable, or that they even switch to a more friendly regime? What are the Iranians seeking, on their part? To rise to the rank of a virtual nuclear military power (if indeed this is the aim of their nuclear program) in order to dominate the region? Or to provide the Shiites with a bomb to counter the one owned by the Sunnites (of Pakistan) and the Jews (of Israel)? Or merely to ensure that they do not undergo the same kind of attack that Iraq was subjected to, and that North Korea, on the other hand, did not suffer, because it owns the nuclear bomb that Baghdad did not have? Under the Presidency of Khatami, Iran was clearly seeking to guarantee its own security. At the time, its talks with the Americans (directly and via the Europeans) failed, as the Bush-Cheney duo that was in power in Washington thought it could impose its will through US super power, without the need to negotiate. Khatami, who had suspended the Iranian nuclear program during the negotiations, reactivated it on the last day of his presidency, before handing over the reins to Ahmadinejad. With the latter in power, replying to the above questions is no longer so easy. Especially since the Iranian ruling class is divided, with the supporters of the Supreme Guide Khamenei on the one hand, and those of the Revolutionary Guard (represented by Ahmadinejad) on the other. It does not look like the Iranian political scene will become any clearer in the foreseeable short term.

Faced with so many uncertainties, wisdom would have it that the parties should prepare for the worst, while at the same time hoping that this does not actually happen. It is now more vital than ever that new players come to the fore, i.e. mediators who are accepted by all parties involved, in order to try to find an outcome to the crisis. In May 2010, the initiative taken by Brazil and Turkey to find a solution ended with failure. It is now urgent that a new initiative (led by these countries and/or others) is forged in order to avoid a major crisis that the Gulf countries and the global economy could really do without.

By Pierre Terzian
Editor
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