The Political Economy of the U.S.-Iran
by Tom O'Donnell
Z magazine, June 2006
Just as the true reasons for the U.S.-British
invasion of Iraq were not "weapons of mass destruction"
or "links to Al Qaeda," so too, the real reason for
the present U.S.-Iran crisis is not about the ostensible "nuclear
threat" posed by Iran. The Iranians are nowhere near to developing
highly-enriched uranium for nuclear weapons. In fact, they appear
to be far from even producing sufficient low-level enriched uranium
to use in fuel rods for their Russian-built nuclear power plant.
But, even if they were near to building a nuclear bomb, Iranian
nukes would not, per se, be why Washington wants to remove the
mullahs from power. Just this February Bush was very pleased to
recognize India as a nuclear power-a country that has actually
done what Washington is accusing Teheran of trying to do. He did
this after India sided with the U.S. against Iran on the International
Atomic Energy Agency's (IAEA) critical report to the UN. So too,
Bush hasn't insisted that Pakistan, a country which admits to
having proliferated nuclear weapons, and which has powerful Islamic
fundamentalist movements, give up its illegally developed nuclear
weapons-rather, he has called Pakistan a "close ally"
of the U.S.
No, the true reason for the U.S. push
against Iran's nuclear program and for "regime change"
is about maintaining U.S. hegemony in the oil-rich Persian Gulf
region. According to the International Energy Agency (IEA), about
60 percent of the world's conventional oil reserves are located
in essentially five countries in the Persian Gulf region. Whoever
has predominant influence there has their hand on "the global
oil spigot"-a prize that brings enormous power and leverage.
Washington has worked since the 1979 Iranian Revolution to keep
the Iran of the mullahs from once again becoming the oil-producing
powerhouse it was under the Shah. Indeed, gradually, especially
in the years just after the Iran-Iraq War, Washington came to
an absolutely firm, bi-partisan consensus that, no matter what
promises the mullahs might make, the mullahs simply cannot be
trusted. Even when the mullahs have offered quite stunning compromises,
Washington has rejected them. Its reasoning is that, if Iran's
production were allowed to rapidly climb (and indeed, it has the
potential for significant growth), the mullah's would become rich
and powerful players and would use their position to undermine
the U.S.-backed Saudi royals and the Kuwaiti emir-and thereby
U.S regional hegemony.
Therefore, the U.S. has actively blocked
Iran from developing its oil and natural gas sector since 1996
by imposing sanctions. However, blocking the development of Iran's
oil potential and, with it, the regional ascendancy of the mullahs,
has thus far been essentially a defensive maneuver for the U.S.
Whatever the various ideological-political rationalizations embraced
by various elements of the bureaucracy and the political elite,
the persistent, material-economic impetus for this evolving crisis
is that the global oil order is facing an inevitable demand crisis.
This crisis eventually requires that new sources of oil be actively
developed and brought to market to meet skyrocketing consumption.
Iran has large oil fields ripe to be upgraded or brought into
new production. According to the U.S. Energy Information Agency
(EIA), Iraq and Iran together have almost 20 percent of the world's
proven oil reserves, respectively the third and fourth largest
in the world. This is the material-economic basis for Washington's
urge to go on the offensive, proceeding now to the next phase
of regime change.
The U.S. is intent on bringing Iranian
oil production up to its full potential, but only under a new
regime, one that it trusts to protect foreign investments and
property rights in oil and which-like Saudi Arabia, Kuwait, and
the UAE-will not use its oil prowess as a weapon.
Many forces are looking to develop Iran's
oil riches. If the U.S. does not want the mullahs to be the beneficiaries
and custodians of this new oil wealth, then they have to get on
with removing the mullahs sooner rather than later. As they learned
in Iraq, they cannot maintain sanctions forever. At a time when
U.S. and UN sanctions on Iraq's oil development were rapidly losing
support in the international community, the events of 9/11 unexpectedly
gave the U.S. a pretext to remove the Ba'ath Party from power.
In the case of Iran, for now, the hook is the ostensible "Iranian
Effects of U.S. Sanctions
Today, Iran produces a little over four
million barrels of oil per day. This makes it the world's fourth
largest producer after Saudi Arabia, the United States, and Russia.
In this sense, of course, Iran is an important player; however,
we need only look a little closer to see what the effects of U.S.
sanctions have been on Iran's place in the global oil order. As
far back as 1974, under Shah Reza Pahlavi-put in power by a British
and U.S.-organized coup-Iran was producing 50 percent more oil
than today. According to the EIA, while Iran has 10 percent of
the world's proven oil reserves, it is producing only 5 percent
of the world's total output (85 million barrels per day).
How can this be? Just look at the miserable
situation inside Iran's oil industry. The EIA's latest report
on Iran's oil sector says, "[Iran's oil] fields are in need
of upgrading, modernization, and enhanced oil recovery efforts...with
current recovery rates at just 24-27 percent (compared to a world
average of 35 percent)." Although Iran is believed to be
rich in offshore oil, it had "only a few exploration wells
being drilled in 2005." In fact, Iran's domestic oil-refining
capability has deteriorated to the point that it now has to import
about one-third of the gasoline its citizens consume. This widespread
degradation of a once world-class oil infrastructure under the
Shah is the intended result of U.S. sanctions-starving Iran of
investment and denying it up-to-date technology. The sanctions
have methodically reduced Iran's oil sector to this miserable
state in order to prevent Iran from gaining influence in the Gulf.
This lack of foreign direct investment
in Iran (FDI) is not a case of Iran refusing to accept FDI based
on some progressive, anti-neo-liberal stand or to preserve the
sovereignty of its nationalized oil fields by refusing to re-privatize
them. Hardly-the Majlis first passed a law in 1987 loosening restrictions
on FDI and took significant steps towards allowing foreign ownership
and operation of its oil fields (albeit in a rather contorted
form, know as "buy back"). Also Iran does receive some
FDI from companies and states outside the reach of U.S. sanctions
and this has caused its oil sector to show some growth over time;
however, it remains in fundamentally poor shape. Further openings
to foreign investment and private-ownership schemes have recently
been considered by the Majlis. While some forces in Iran oppose
further openings to FDI, this is certainly not a case of Iran
refusing to take foreign money. Rather, it has been U.S. sanctions
which have blocked Iran from re-attaining its former oil-producing
The U.S. likes to focus on how the incompetent
economic policies and corruption of the clerical government have
caused economic hardships for the Iranian people. This is a case
of one thief yelling at another "stop thief" to avert
attention from one's own crimes. The mullahs are indeed incompetent
and corrupt; but so are the other royalist regimes of the Persian
Gulf region. Nevertheless, those other regimes are all presently
enjoying an unprecedented economic boom due to the high price
of oil over the last three years while Iran is suffering huge
Iran is in such internal economic difficulties
due to the effects of sanctions undermining the oil sector that,
at a time when their neighbors in Saudi Arabia have a national
stock market that exceeds the size of the Chinese stock market,
the mullahs have been forced to dip into the state's long-term
oil-emergency funds, taking out almost $3 billion that had been
set aside for times when the price of oil might collapse. This
they have had to do just to maintain food and gasoline subsidies
for the people.
Origins of U.S. Sanctions
It is interesting to see how these sanctions
came about and how broadly they are supported by the U.S. political
elite. Sanctions on FDI from U.S. firms were first imposed by
Clinton's executive order in 1996, which prohibited U.S. companies
and their foreign subsidiaries from conducting business with Iran
and from financing any oil or gas development there. This order
was imposed in direct reaction to an announcement that Iran's
then-prime minister, Rafsanjani, desperate for foreign investment
in the oil sector, had pushed aside whatever remaining Islamic-revolutionary
sentiments members of the parliament, the Majlis, still harbored
(i.e., though foreign investments in oil are actually outlawed
by the 1979 constitution, a 1987 law manages to get around this).
Iran then accepted a $600 million contract with the U.S. firm
ConocoPhillips to develop a new offshore field.
Normally, the U.S. has actually pushed
countries to accept FDI-so this reaction to a major deal by Iran
and a U.S. oil company is a complete anomaly in that regard. The
crucial difference here is that when Kuwait or Algeria or Libya
and others have recently announced that they will now accept FDI,
the U.S. has seen this as an opening for foreign capital and as
an important achievement for the global neo-liberal agenda within
the oil sector.
However, a pre-condition for this welcoming
attitude is that the governments which have accepted FDI be judged
by the U.S. as "reliable" to guarantee the interests
of the investors, and that the new oil-producing capability will
not be used against U.S. geo-strategic interests. If, however,
the country is judged "unreliable" or a "rogue"
regime, then the U.S. will oppose the investments. (For example,
Cuba falls into the second category. Earlier this year, when the
U.S. Justice Department "caught" representatives of
ExxonMobil meeting with Cuban officials at a Mexico City hotel
to discuss FDI in Cuba's newly-found offshore oil fields, they
forced the hotel to expel the delegations.)
In the case of Iran, even though Clinton's
executive order had blocked U.S. companies from developing Iran's
oil-sector prowess, there were plenty of companies from other
countries who were perfectly happy to invest in Iran's oil. So
Congress passed the U.S. Iran-Libya Sanctions Act (D'Amato Act)
of 1996, which Clinton signed. It was renewed for five more years
in July 2001. Under this law violators face mandatory and discretionary
sanctions imposed by the U.S. government on non-U.S. companies
investing more than $20 million annually in the Iranian oil and
natural-gas sectors. Initially, the Iran-Libya Act was opposed
by European countries, Japan, and others as an outrageous and
illegal extraterritorial extention of U.S. domestic law over the
investments of other countries. But the U.S. law has prevailed.
These U.S. sanctions were presented as
necessary to stop either Iran's nuclear aspirations or to block
Iran's support for terrorist groups in the Middle East or to support
democracy in Iran or whatever. Of course, there is no doubt that
the Iranian clerical regime has had aspirations of spreading Islamic
revolutions throughout the Middle East and might wish for having
nuclear weapons to threaten the U.S., Israel, and whatever other
enemies it identifies-and the regime has its own self-serving
definition of democracy. However, to assess the true intent of
U.S. sanctions, one has only to look at the particular tool the
U.S. chose to use and its clear effects. That tool was comprehensive
sanctions on investments in Iran's oil industry and the clear
effect has been to keep the clerical regime from being a significant
player in the oil-rich region, unable to challenge the U.S. and
its client states there. Furthermore, it has weakened the regime
economically to the point that the U.S. is now ready to move to
the next phase-to use force against the regime. Only after it
has removed the regime and replaced it with one that accepts the
U.S. as the regional hegemon will the U.S. allow FDI to flow into
Iran's oil sector. (Note, this is precisely the sequence it has
followed with Iraq, a country whose oil potential is roughly equal,
or somewhat greater, than Iran's, also under cover of a plethora
of complaints about Iraq's nuclear program, terrorism, etc., to
mask the oil-hegemony issue.)
Aims Of The Iranian Mullahs
Given the devastating effects of the U.S.
sanctions, the most fundamental aim of the mullah's regime, their
bottom line in the present confrontation, is removal of the U.S.
sanctions on FDI in oil and natural gas and U.S. security guarantees
(i.e., that the U.S. will not attack or pursue regime change).
Of course, the standard press story is that the Iranian government,
at present under President Ahmadinijad, has been dogmatically
inflexible, especially when it comes to its nuclear program, its
dedication to Islamic revolution and support for terror groups.
This is not the case. The facts show that the mullahs' regime
is now quite desperate to stay in power, even if it means surrender
of its supposed sacred principles. The most striking proof is
that, in 2003, it offered a "grand bargain" to the United
States. According to Flynt Leverett, then the National Security
Council's senior director on Middle East Affairs, and others,
the Iranian government offered to end its support of Hamas and
Islamic Jihad in Palestine and to transform Hezbollah into a social-political
organization. In return, it wanted an end to the sanctions; it
wanted security guarantees and U.S. assistance in joining the
WTO. It also was willing to meet with U.S. ambassador Khalilzad-then
in Afghanistan-to hold negotiations, and to reveal the names of
Al-Qaeda leaders it had detained in Iran, in exchange for the
names of members of the MEK (Mujahadeen-e-Khalq) that the U.S.
had restricted to a base in Iraq. Needless to say, these are stunning
concessions for the Iranian leadership whose entire self-identity
is bound up with being the center of the Islamic, and especially
Shi'ia, fundamentalist struggle against the U.S. and Israel. But
the U.S. refused this "grand bargain," and reprimanded
its ambassador in Vienna for passing along the offer from the
Iranian government (Gareth Porter in "Necon Cabal
Blocked 2003 nuclear talks," Asia Times, March 30,
What more could the U.S. want? The answer
is that Washington, and the neocons in particular, will accept
nothing short of the complete removal of the clerical regime,
and to reduce Iran to the status of a U.S. protectorate alongside
other oil-producing states of the Persian Gulf region.
There Is No "Oil Weapon"
Many believe that the Iranian government
can use the oil weapon to deter a U.S. attack. But the oil weapon
has long ago been removed from their arsenal precisely as a result
of the U.S. sanctions. Iran exports only about 2.5 million barrels
of oil per day. For purposes of comparison, the amount of oil
the U.S. needed after Katrina to temporarily replace its domestic
Gulf Coast output was 2 million barrels per day, or 80 percent
of the total exports of Iran. Two things are important to understand:
first, the U.S. was able to effortlessly pump this amount of oil
from its Strategic Petroleum Reserves (SPR), which are part of
the larger oil stockpiles maintained by the IEA for First World
states. The second relevant fact is that there are now over four
billion barrels stockpiled in the First World's combined strategic
petroleum reserves. What this means is that there is now so much
oil stored in the First-World's SPR that the U.S. could have continued
to withdraw oil at the post-Katrina rate-a rate greater than the
entire daily needs of France (1.9 million barrels)-for over 5
years. In any case, the leader of the International Energy Agency,
Claude Mandil, recently said that there was at least enough oil
in its SPR to keep supplies going for 18 months if Iranian exports
completely stopped. He reassured those states now negotiating
with Iran over its nuclear program, saying that they "did
not have to worry about an eventual loss of Iranian oil because
you have the means to deal with it."
In this state of affairs, if the mullahs
are foolish enough to cut off oil exports, undoubtedly the U.S.
would allow the press to foment hysteria about "economic
warfare" and "oil blackmail," etc., and the price
of oil would soar even higher due to the panic. If and when there
is any real need for oil for civilian or military consumption,
the IEA could order the necessary release from its huge stockpiles.
Iran would achieve no real leverage whatsoever against either
the U.S. sanctions or a military assault. Rather, President Ahmadinejad
and (Supreme) Leader Ayatollah Ali Khamenei would have handed
the U.S. the sort of "emergency" it requires in order
to mobilize domestic public opinion and recruit fresh troops for
hostilities against Iran. (The U.S. is, however, endeavoring to
manufacture some "emergency" to do with nukes, and,
of course, might also utilize "links to terrorism,"
etc., as required.) The mullahs seem to realize that this is the
situation, as they have quickly denied the rumors and statements
that periodically emerge to the effect they are considering using
"the oil weapon."
What has this left the mullahs with in
order to pressure the Americans to remove sanctions? They have
seen North Korea wield the threat of nuclear weapons to force
the big powers of Asia and the U.S. to negotiate with it. However,
if the nuclear threat has been a masterful performance on the
part of the North Koreans, it has been an impotent act of desperation
on the part of the mullahs.
There are important differences between
North Korea and Iran. First is that the North Koreans actually
have a bomb. They have shown it to visiting foreign scientists
and they fired a missile from North Korea over Tokyo to land in
the ocean beyond. Needless to say, the North Koreans' nuclear
program is not exactly what you might call an "empty threat."
On the other hand, the Iranians clearly do not have a working
nuclear power plant, much less a bomb. Further, the North Koreans
have no oil, or, at present, anything else that the U.S. particularly
wants to control while Iran is (potentially) one of the richest
oil and natural gas states on earth. This means that the U.S.
is looking for any excuse they can find to go on the offensive
against Iran and to change the regime. This means that the empty
Iranian nuclear threats are not much of a bargaining chip-as has
been demonstrated by the past two years of intensive negotiations
with the U.S. indirectly, via the EU-3 and Russia. What is more,
Iran's hyped nuclear threat, along with Ahmadinejad's demagogic
denial of the Holocaust and sabre-rattling against Israel, have
given the Europeans and others cover to side with the U.S. Once
again, as during the Iran-Iraq War, the fate of the Iranian nation
is in the hands of this corrupt, reactionary, and incompetent
strata of mullahs and their adherents.
The issues at stake for the U.S. in the
present confrontation with Iran are central to the maintenance
of the U.S. empire and go to the heart of its hegemony in the
global oil order. But this U.S.-engineered state of affairs is
Let's look at the political-economic facts
here. Both the IEA and EIA have been consistently warning of continued
global oil-demand growth. The IEA projects that the total global
oil output must increase by two-thirds from 2001 to 2020 and that
this will require some $3 trillion of investments, mainly in the
Persian Gulf where world oil reserves are concentrated. This imperative
led to a concerted push by the U.S., beginning with the Clinton
administration, to have OPEC states begin to accept FDI in their
nationalized hydrocarbon sectors. The constitutions and laws of
many of these states had prohibited foreign ownership of, or investments
in, their hydrocarbon sectors since 1974 when OPEC states nationalized
their oil. The 2001 National Energy Plan (aka, Cheney Plan) lauds
the broad success till then in opening up a long list of "friendly"
states to FDI in the Persian Gulf and North Africa. However, there
is considerable distress in the global oil industry and among
oil-consuming states generally that this investment is not proceeding
rapidly enough to prevent productive capacity from falling decisively
behind demand by the oft-cited 2020 deadline. And it takes from
seven-to-ten years before investments in new capacity actually
come on line.
In particular, the EU Commission, in March
2006, issued a comprehensive report (Green Paper). Among other
things, it raised the concern that investments are not proceeding
rapidly enough in the Middle East oil states, partially because
the U.S. occupation of Iraq has not gotten Iraq's oil on line
quickly enough and also because political uncertainty there is
causing states to retreat from opening their oil sectors to FDI
as quickly as had been hoped.
In short, all players in the international
oil order agree that Iran's oil fields (not to mention Iraq's)
need to be opened as quickly as possible to FDI. In this situation,
the Europeans, especially the EU-3, have decided to throw their
lot in with the U.S. in this confrontation with Iran.
The Russians and the Chinese aren't objecting
very strenuously. The world's second largest economy, Japan, is
firmly in the U.S. regime-change camp. The imperative to get Iran's
oil on line is the main factor behind this multilateral support
for the U.S. in confronting Iran. But, one cannot imagine these
other powers waiting forever to bring Iran's oil on line. If Washington
doesn't want to allow the mullahs to develop Iran's oil, they
have to remove them. It is crucial to recognize that this is not
merely a matter of some subjective neocon ideological bent which
is driving the U.S. to forcible regime change in Iran (though,
of course, this exists); rather, it is the objective political-economic
realities of the oil order today that are compelling the U.S.
to take the offensive if the oil order is not to be undermined
by a demand crisis in the future. Such a crisis could, in turn,
spell disaster for global capitalism generally, as well over 90
percent of all transportation is dependant on oil.
It should be noted that, in fact, the
present demand crisis in the global oil market might not actually
be a crisis-there might be no issue of a narrow worldwide supply
cushion or of record-high prices-if U.S. sanctions had not prevented
Iran from developing its full oil potential.
Many assume that the U.S. does not now
have the military forces or the political latitude to attack Iran.
This view misinterprets the particular stage of America's regime-change
campaign against Iran. Arguments include the continuing difficulties
for Washington from its three-years'-long occupation of Iraq and
recent polls showing most Americans are now opposed to that occupation.
At this point, regime change requires initiating more complete
sanctions against Iran (under the UN) and possibly beginning to
cripple its defensive capacity by violent means. This can be done
without the deployment of a significant number of U.S. troops
Of course, it is not possible to predict
U.S. military tactics with any certainty; however, let us look
soberly at the present stage of the U.S. regime-change process
vis-vis Iran. Iran has a respectable Air Force and significant
amounts of surface-to-surface, anti-ship, and other missiles.
In the course of a U.S. bombing campaign against Iran's nuclear
sites, it would be likely for the Iranian Air Force to challenge
U.S. planes (not to do so would disgrace the regime). The U.S.
would likely use this as a pretext to destroy whatever portion
of the Air Force it could find, along with Iranian radar and missilelaunching
facilities, etc. This would be infinitely more significant, in
the short run, than the destruction of Iran's nuclear facilities,
which are far from producing nuclear power-station rods, much
less any high-purity, bomb-grade uranium-235. Once Iran's Air
Force is crippled, the country would be susceptible to ground
incursions by various forces hostile to the regime. These might
include Kurdisih, Azerbaijani, and other nationalist separatist
forces, which have long fought against Iran's central government.
It would very likely include the formerly Saddam-supported MEK,
which signed a truce with U.S. forces during the occupation of
Iraq and which Rumsfeld, Wolfowitz, and others have repeatedly
expressed interests in utilizing within Iran. In addition, there
are royalist or even democratic-opposition groups of various types.
One is reminded of the contra war that
the U.S. employed against Nicaragua in the 1980s, however perhaps
with the addition of U.S. air support and no-fly zones enforced
on the Iranians, like those which were enforced by the U.S. and
British Air Forces over Iraq. It was this that allowed Kurdish
forces to establish their de-facto separate state in Northern
Iraq. In addition, it should be noted that, in the final stage
of the Iran-Iraq war of 1981-89 the U.S. Navy intervened on behalf
of Iraq and sank essentially the entire Iranian Navy in short
order. Any attack on the nuclear facilities may produce a replay
This scenario is painted solely to demonstrate
that a campaign against Iran, which presupposes the deployment
of no significant number of U.S. troops within Iran, is conceivable
and which, together with comprehensive UN sanctions to augment
the present U.S. sanctions, could be carried out and be devastating
for the mullahs' regime-and the Iranian people.
What is crucial here is that one must
not underestimate the willingness of the present U.S. leadership
to take what it sees as necessary, paradigm-altering measures.
In this regard, the liberal op-ed commentator and Princeton economist
Paul Krugmann has often made an important observation. That is,
the Bush administration and neocons see themselves as "revolutionaries."
What I have been endeavoring to illustrate is that the right-wing
"revolutionary" sweep of the present Administration
in the case of the Iran crisis is not merely a subjective, political-ideological
phenomenon (though, of course, it is also that). Rather, it has
a material-economic basis in the imperatives of the present global
oil order. If this is true, then it is not at all irrational.
In fact, from the perspective of maintaining U.S. hegemony, it
is perfectly "rational" for the U.S. to do as Rumsfeld,
Cheney, Rice, and Bush are wont to do: to ignore the "difficulties"
of their present Iraq occupation, lack of military manpower, and
negative U.S. and world public opinion-and proceed to Tehran.
Whether the Iranian people would defend
the regime so as to defend the nation or whether they would oppose
both the regime and the U.S. for together bringing disaster on
Iran cannot be predicted. One hopes the latter. That is the only
path for the long-suffering Iranian people to once and for all
take matters into their own hands, to avoid their struggle being
co-opted by the nefarious plots of either force, and to complete
the democratic, national liberation struggle that was derailed
by the mullahs in 1979.
Tom O'Donnell is a faculty member at the
University of Michigan, Ann Arbor. He is a nuclear physicist whose
teaching and research includes the global political economy of
oil, energy-and-environment, and Middle-East political affairs.