Rossputin.com Rational Thinking About Our World

see "The Iranian petroleum crisis and United States national security"
Roger Stern, Johns Hopkins University
Published in the Proceedings of the National Academy of Sciences, December 2006
http://www.pnas.org/cgi/reprint/0603903104v1.pdf

In his highly technical but fascinating study, “The Iranian petroleum crisis and United States national security”, Roger Stern makes the case that although Iran is likely hiding nuclear weapon ambitions behind claims to need nuclear power, that does not mean their stated need for nuclear power is false. Furthermore, that need is a real weakness for Iran which the world can try to exploit actively or passively.

The crux of Stern's argument is as follows:

• Iran spends its oil export profits, which account for 63% of government revenue, on welfare payments and to subsidize the cost of domestic energy consumption rather than on reinvestment in oil infrastructure.
• The domestic subsidies are causing Iran’s internal demand for energy (oil, gasoline, and natural gas) to grow at the fastest (in percentage terms) rate of any country.
• Iranian oil infrastructure is crumbling, with large amounts of oil (and therefore money) being lost through leakage in addition to the depletion of existing fields. (Stern makes a point of noting that this has nothing to do with the current faddish “peak oil” theory, which I suspect he does not subscribe to, and neither do I.)
• Combining increasing domestic demand with loss of production through leakage and depletion means that the amount of oil available to export is declining by 10%-12% per year, meaning that “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.” (emphasis mine)
• Since popular support for the Iranian government is largely based on their generous welfare programs and subsidies, Iran needs nuclear power in order to free up more oil to be exported.

Stern’s policy conclusions are also quite interesting, even if I don’t entirely agree:

First, as Stern has argued before, the “oil weapon” basis for much of US policy toward the Middle East is fiction. (See this article for more on Stern and the “oil weapon”: http://www.jhu.edu/~gazette/2006/23jan06/23oil.html ) Instead, it is simply cartel market power that keeps oil prices high and permits oil rich countries to become (at least locally) powerful. Stern therefore says that although the US prevents “wars of seizure” such as Iraq taking over Kuwait, such peace-keeping does not cause the price of oil to decline. Instead it protects the current situation to the benefit of OPEC monopolists. Stern does not argue that we should get out of the way and allow wars of seizure, but rather that we will not diminish the power of Iran and Saudi Arabia until we reduce their market power. I agree with this position and have argued in other writings that the “oil weapon” is an imaginary monster of our own creation.

This brings us to Stern’s second policy conclusion: The world should create a “price attack” on oil producers by improving fuel efficiency (“f-e”) throughout the economy in order to reduce demand for oil. Stern is not shy about suggesting that such changes might need to be forced on oil importers by some combination of “fuel taxation, cap and trade mechanisms (for horsepower, emissions, or miles traveled), or fleet f-e standards.”

While the idea of a “price attack” on OPEC certainly brings a smile to my face, Stern’s suggestion bothers me on both theoretical and practical grounds. I believe that free markets make far better decisions than bureaucrats, and that trying to regulate supply and demand for a commodity by taxing it is a terrible idea, likely to cause at least as much damage from negative unintended consequences as any intended benefit. Even though I agree that we have a real strategic goal in limiting the income of Iran and other such states so that they have fewer resources with which to build their militaries, nuclear weapons, and terrorist-funding capacities, I am loath to say that sacrificing our economy or quality of life by turning toward a command-and-control economy is a price worth paying.

Additionally, Stern notes that efficiency improvements in US oil consumption alone would not be big enough to create a substantial market impact. This means that at least Europe but likely also China and/or India would need to go along in order to create a truly effective attack. I believe this is exceptionally unlikely for reasons of high cost, political difficulty, and the likelihood that OPEC would successfully peel off countries by promising favorable pricing in return for guaranteed demand.

Stern also points out that the hardships which Iran endured in its long and destructive war with Iraq were much greater than any potential economic sanctions the UN or the US might impose, and therefore such sanctions are likely to be ineffective.

Stern’s suggests (and it makes good sense to me) that Iran’s oil infrastructure can not be improved fast enough to keep up with increasing demand and lower production, representing a major weakness for Iran and liability for their government. It is a weakness that the US can best exploit by sitting back and waiting for their disastrous “Soviet model” policies to have the effect they must eventually have, that is destroying the ability of their oil industry to both supply the domestic market and generate enough export revenue to fund the welfare programs which keep the people supporting the government. Our best attack against Iran may be to do nothing.

Overall, Stern’s analysis is truly fascinating, offering the first well-founded argument I have seen for Iran actually needing nuclear power. (Again, this does not imply that they are not trying to develop nuclear weapons capability under that cover.) Their need represents a chink in the armor of Iran and OPEC which we can attack by decreasing global demand for oil. I disagree with Stern that that objective justifies massive worldwide taxes or policy changes which threaten the economy or standards of living. Therefore, I believe we should take Stern’s more passive approach to Iran, simply waiting for their oil-based welfare state to collapse while using any force necessary to ensure they do not acquire nuclear weapons.