A Contrarian View: Sticks And Carrots – Energy Co-Operation And Iran

By Chris Cook
Friday, February 15th, 2013 @ 12:00AM

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Since the Iranian Revolution in 1979, the United States has

periodically issued sanctions on trade with and weapons sales to Iran. 
 
In 1996, the Iran-Libya Sanctions Act (ILSA) extended the economic sanctions on Iran to curtail its nuclear program and support to terrorist organizations, such as Hezbollah and Hamas. However, the enforcement of the sanctions was lacking, and waivers have been issued on case-by-case bases. While this half-hearted sanctions regime had affected Iran, it was the removal from the SWIFT system that had tightened the rope around its economy. But Iran’s leadership, which is utterly corrupt, has not given up its nuclear armament program, which it has repeatedly vowed to use against the Jewish State of Israel, attack its enemies — real or manufactured — in the region, as well to inflict a deadly blow on the Unites States, all in effort to spearheading the arrival of the Twelfth Imam.

This determination is what American and Western “pragmatists” seem unable to grasp. Theirs is a money-oriented world-view, while the fanatical, greedy and corrupt Shiite clerics’ is religious.

Iran’s Ayatollahs’ thinking is as rational as was Osama bin Laden’s. And while the majority of the Iranian people resent the economic strain, they seem willing to endure the sanctions as part of the national effort to develop nuclear weapons. Clearly, the sanctions, as implemented thus far, have not yielded the desire effect. However, talks with Iran, leaving the militarization issue on the side, because “Iran is using that as a bargaining chip,” is missing the point, and would give it the time necessary to enrich uranium enough to arm several warheads, an eventuality that this Administration seems to have accepted already. —Rachel Ehrenfeld

 

STICKS AND CARROTS – ENERGY COOPERATION AND IRAN

 Chris Cook*

At a recent conference in London on Iran policy co-convened by the Henry Jackson Society and the Foundation for the Defence of Democracies, John Hannah (Senior Fellow, Former National Security Advisor to Vice President Dick Cheney), no soft touch on Iran, made the point that whatever is done with the stick of sanctions, the US will have to present some new carrots.

Based upon 25 years’ top level experience of energy market regulation and development, my current position as a Senior Research Fellow at University College London’s Institute for Security and Resilience Studies has enabled me to visit and interact at high level with Iran’s energy complex in the last few years, and to gain some insights as to what is going on, and what sort of carrots may be palatable.

Sticks – Sanctions Generally

While the extremely tough US and EU sanctions have been instrumental in bringing Iran to the table, there will be no regime with whom to negotiate before Iran’s Presidential election in June.

Quite possibly, even after this election, there will be no coherent regime policy position either, because the multipolar nature of Iranian government is such that while there are several effective negative vetoes, notably the Supreme Leader’s, there is no unitary positive decision making power.

Physical Sanctions

Current dumb sanctions are counter-productive and benefit Iran in the medium and long term.

Iran makes as much from exporting 1m barrels per day (bpd) at $110/bbl as they would do from exporting 2m bpd at $55 /bbl. This is probably the price level to, and even through which the oil price would (at least temporarily) fall once the current ‘Iran Risk Premium’ leaves the market and Iran re-starts supplying the EU, particularly Greece, Spain and Italy. The current price bubble will then collapse as the previous bubble did in 2008.

Currently, Iran therefore gets to keep valuable crude oil in the ground, and can blame the Great Satan for the higher gasoline prices which they have been keen to impose in order to discourage wasteful use and to address the catastrophic environmental problems which results from cheap poor quality fuel.

Financial Sanctions

These smart sanctions are what has brought Iran to the table. But even so, they are a double-edged sword. Excluding Iran from the SWIFT bank messaging system runs the risk that another complementary web-based system may be developed.

A major problem in future negotiations is that there are many US legislators who are unlikely to agree with reducing financial sanctions short of regime change.

Carrots – Energy Security

If we assume that due to mutual lack of trust it will be impossible to make progress on sanctions, then the only possible avenue for progress — as John Hannah pointed out — is to improve upon the current less-than-attractive offer of spare parts for Iran’s superannuated Boeings, and so on.

For most countries the principal objective of domestic and foreign policy is energy security and energy independence. Iran is no different, and putting to one side the vexed question of military use of nuclear technology, it has long been Iran’s policy that when their oil and gas runs out, nuclear energy will be key to providing energy security.

As in many other fields, Iran’s energy policy and technology lags decades behind other countries. This creates an opportunity for constructive engagement with Iran through energy co-operation, which transcends religion and ideology.

Energy Co-operation – Software is the New Oil

Even through the darkest days of the Cold War the USSR reliably supplied natural gas to Europe who reliably paid for it: ironically it took privatisation and the advent of oligarchs and opaque middlemen to cause interruptions in supply. Likewise, during the radical Khomeini years from 1979 to 1993, Iran reliably supplied crude oil to Israel via Marc Rich.

I believe that the US in particular (and Israel) should offer to flood Iran with the technology, knowledge, equipment and skills necessary for investment on a massive scale in renewable energy (MegaWatts) and above all in the low hanging fruit of Nega Watts of energy savings and Nega Barrels of carbon fuel savings.

Supplying such equipment and technology would be hugely profitable for the suppliers whose competitors in the EU, China and Japan are all over Iran despite sanctions. But more importantly, it will — as it is doing everywhere else — compete with nuclear energy to the extent that Iran will rapidly come to the same conclusion that further nuclear development is a complete waste of money and resources.

So my advice to US policy-makers is to focus on a new policy of constructive energy co-operation with Iran. Based upon my experience in Iran I have no doubt that energy co-operation through technology transfer and investment would be received warmly by a country with probably one of the greatest pools of untapped human and intellectual resources on the planet.

*Chris Cook, a Senior Research Fellow at UCL Institute for Security and Resilience Studies, was a market regulator at the Association of Futures Brokers & Dealers, and then at the International Petroleum Exchange (latterly as a Director). At the IPE, he developed successful new trading mechanisms such as Exchange of Futures for Swaps; Volatility Trades; and Settlement Trades. Between 1998-2000, he founded and developed NewClear, a generic transaction confirmation concept, still widely used in global markets. Chris now works mainly in Scotland, with Nordic Enterprise Trust.
 

FURTHER READING:

WP: Iran’s bid to buy banned magnets stokes fears about major expansion of nuclear capacity

HP: Iran’s Nuclear Upgrade Confirmed By Diplomat

Trend: Iran-Afghanistan bilateral ties unaffected by Western sanctions

GALLUP: Iranians Feel Bite of Sanctions, Blame U.S., Not Own Leaders; Most support nuclear program despite sanctions

The Washington Free Beacon: The Atlantic Council’s Sanctions-Busting Backers

BAKER Institute: “Weighing Benefits and Costs of International Sanctions against Iran.” 

RT: Sanctions cost Iran $40bn in 2012, oil production contracts

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