The Political Economy of the U.S.-Iran Crisis

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 nuclear threat."


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 prowess.

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 budget deficits.

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, 2006).

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 not sustainable.

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.


Regime-Change Tactics

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 within Iran.

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 of this.

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.

Iran watch

Home Page