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Iran’s stance at the recent Moscow talks shows that the current sanctions are too weak to avoid a drift towards a pre-emptive Israeli attack on Iran’s nuclear programme or a nuclear weapons-capable Iran; both scenarios could catastrophically upset oil prices and economic growth. As Iran’s defiance continues and Israel’s patience drains away, the time has come to increase pressure on Tehran. The US and allies should implement a quarantine-and-release strategy that severs Iran’s oil exports and offsets the loss of supply with higher Saudi production and strategic stock draws.
Unilateral sanctions implemented by the US and the European Union are imposing a cost, but they have not deterred Iran’s leaders from accelerating the nuclear programme and are unlikely to do so.
First, sanctions are not tough enough and are being evaded. Iran’s crude supplies have been curtailed since the end of 2011, oil prices have been dropping sharply and an EU embargo will take effect next month. But the impact on Iran’s oil sales and revenues is unclear. The US liberally issued waivers for Iran’s oil customers ahead of sanctions taking effect today. Some of Iran’s biggest Asian customers are taking steps to circumvent the EU tanker insurance ban. Meanwhile, Iran has switched off tanker tracking devices, making it harder for analysts to track sales.
Second, the timeframe for sanctions to work is shortened by US and Israeli disagreement over where and when to draw red lines on Iran’s nuclear programme.
Given the shortcomings of current sanctions and the need to halt Iran’s nuclear programme, the time for intrusive sanctions has arrived. Tehran should face an ultimatum with a short timeline: comply fully with all UN Security Council resolutions on its nuclear programme or the US, EU and any like-minded countries will use all means necessary to halt Iran’s international commerce, excepting humanitarian goods and food. If Iran did not comply, the quarantine could be imposed by biting sanctions and if necessary a naval cordon.
Before the expiry of the ultimatum the International Energy Agency and Opec would organise a co-ordinated release of extra oil supplies to the market equal to the flow of Iran’s oil exports. Whatever the level of Iran’s exports, they could easily be replaced for many months with supplies of similar quality crude oil and products from excess Saudi spare capacity and strategic stocks.
As the noose tightens, allies would have to ready themselves in case Tehran decides to lash out. The already brisk flow of additional armed forces into the region would be stepped up and logistical preparations for a quarantine prepared. Saudi Arabia and the UAE could begin to redirect exports towards pipelines that avoid the Strait of Hormuz.
These preparations along with a co-ordinated, precautionary increase in oil supplies from producers and strategic stocks would underscore the credibility of the quarantine threat, increasing the odds that Tehran’s rulers will concede. If they did not, they would find themselves in an untenable position. Oil exports provide half of the Iranian government’s revenues and account for nearly 80 per cent of export earnings. Without this revenue stream, Iran’s economy would grind to a halt. If Tehran escalated the crisis, by disrupting oil production and exports, allied forces would have to respond appropriately.
One way or the other, Iran’s defiant pursuit of nuclear weapons is going to lead to oil price spikes. A quarantine is technically an act of war, but so is attacking Iran’s facilities with cyber-weapons. Quarantine-and-release could add a “fear premium” to crude prices, especially if Tehran chose escalation and conflict. But crude price spikes would result in the event of military action or if Iran acquired nuclear capabilities. Given the urgency and alternatives, there is little to lose in taking this step to stop Iran’s march to having nuclear weapons.
was senior director for International Energy on the National Security Council under George W. Bush and is president of the Rapidan Group