On Iran’s gas via the estimable Laura Rozen, a report on another effort to put paid to the Axis of Evil by cutting
off Iran’s imports of gasoline, this time via a nonbinding bipartisan
Congressional resolution proposed by Democrat Gary Ackerman of New York and
Republican Mike Pence of Indiana.
It’s being floated at the AIPAC
As we sweat through a summer of
US$4 gas, it certainly is infuriating to see Iran sucking up seven million
gallons per day of the precious juice from the international market - and
selling it for less than a buck a gallon at the pump in downtown Tehran.
But it appears likely that
futility and frustration will continue to stalk the United States in our gas
war with Iran.
There was a spasm of hope in
the US foreign policy community last year when Iran tried a free market
solution to dealing with its citizenry’s overconsumption of subsidized gas. It
raised prices. Some gas stations were burned down, conjuring up the specter of
a righteous petrocarbon revolution.
However, the government backed
down, guaranteeing a monthly ration of gas at the ridiculously low price. The
mollified protesters duly returned to their gas guzzlers.
The issue returns whenever the
United States casts around for another way to pressure Tehran.
Previous efforts to cut off the
flow through something I would characterize as “moral suasion plus” - the
threat of US Treasury sanctions against banks that handle gasoline letters of
credit - led to one of those irritating free market reactions: the Iranians
shifted their purchases to cash at slightly higher prices on the $ingapore
market early this year.
The Ackerman-Pence resolution
specifically excludes military action. That means the only additional measure
open to the Bush administration would be to explicitly threaten financial
reprisals, which are not so easy.
It’s a good bet that the second-tier
banks that Iran has turned to for cash transactions have minimal U.S. presence
and therefore are relatively impervious to the big stick in the Treasury’s arsenal
- the threat that an offending bank will be cut off from the U.S. financial
If the bank isn’t intimidated
enough to self-enforce the ban on Iranian transactions, then the U.S. has to
detect and trace murky cash transactions in violation of national bank secrecy
laws, threaten multiple jurisdictions and institutions with punitive sanctions,
and basically risk the danger of appearing like Elmer Fudd shooting the global financial house to pieces while he’s chasing Ahmadinejad’s
The classic story of sanctions
is Action: Meet Reaction.
Even as the U.S. government
labors to exploit Iran’s gasoline import vulnerability, Iran is preparing its
riposte. And that means we have to prepare a riposte to their riposte.
An outfit called the Institute
for the Analysis of Global Security provides an interesting insight into where
a single-minded commitment to escalation can take one.
In a December 2006 report
entitled Ahmadinejad’s Gas Revolution:
A Plan to Defeat Economic Sanctions, IAGS authors Anne Korin and Gal
Luft take aim at Tehran’s diabolical plan to reduce its dependence on imported
gasoline, decrease its energy costs, and improve the environment... by
converting automobiles to liquefied natural gas.
In its conclusions, the report
“If Ahmadinejad’s plan for
energy independence is implemented, within five years Iran could be virtually
immune to international sanctions.”
The solution, in Korin and Luft’s
view: more sanctions, sabotage, economic warfare, and punitive US actions to
strangle the Iranian LNG demon in its cradle. If the Iranians switch to
bicycles, I suppose the next step will be a war on gravity.
Previous efforts to cut off the flow through something I would characterize as "moral suasion plus" - the threat of US Treasury sanctions against banks that handle gasoline letters of credit - led to one of those irritating free market reactions: the Iranians shifted their purchases to cash at slightly higher prices on the $ingapore market early this year.
But for the time being, I
suppose we can take solace in the fact that the Iranians are so stupid they don’t
build sufficient domestic refining capacity to turn their own crude into mogas (motor gasoline).
Well, maybe not. Iran is aware
of the problem.
Maintenance and expansion of
their Shah-era refineries have been crippled by US sanctions - sanctions whose
likely purpose in part is to prolong Iran's vulnerability to the "gasoline
weapon". As a result, the product mix includes only 17 per cent gasoline, about half of what a reasonably
well-run refinery can achieve. If Iran could get those existing refineries up
to capacity, they might not have to import any gasoline at all.
The government has bitten the
bullet and decided to drop Euros 2.2 billion on a contract with China’s Sinopec
to expand the gasoline output of two of its key refineries.
But there’s a good reason why
the Iranian government has been reluctant to pull the trigger on these large,
vulnerable, delicate, and ridiculously expensive facilities.
According to my
back-of-the-envelope calculation, not building refineries makes perfect sense
for Iran - at least in the context of socialist fiscal policy.
pumps crude at a cost of, let’s say, $20/barrel and sells it for north - way
north, today - of $120 a barrel. Let’s assume a profit of about $100/barrel.
Gasoline costs about $140/barrel wholesale. To make things simple, let’s say
that Iran has to export 1.4 barrels of crude to net enough money to import one
barrel of gasoline. Cost to Iran of that barrel of gasoline: $28 dollars in
crude production costs. 42 gallons per barrel. Divide
$28 by 42 and... you get a cost of 67 cents a gallon, about the price it’s
selling for at the pump in Tehran.
In other words, by the
mathematics of a crude-based planned economy, Iranian motorists are getting
gasoline roughly at cost.
Of course, from the a
centrally-planned economy point of view, there should be better ways to spend
Iran’s oil wealth than creating a thick brown haze over Tehran - and
generating that ineffable sense of car-fueled freedom that is supposed to be
the exclusive birthright of secular, capitalist free market economies.
As to the no-brainer of
building a refinery inside Iran to meet its gasoline needs, refineries are
supposed to be built in major consumption centers, not production centers.
With a population of 50
million, Iran can stake a claim to be the Middle East’s major consumption
center. However, there is a 25 million ton surplus of gasoline production
capacity in the Middle East already.
In Saudi Arabia they already
have eight refineries with a throughput of 2.1 million barrels per day. They are
expanding local capacity by 25 per cent to 2.5 million barrels per day at a
cost of $12 billion.
Looking at the local glut, the
Saudis have recognized that further refinery growth has to be near consumption
centers, and they are putting another 800,000 barrels worth of capacity in
Long story short, there’s extra
gasoline in the Middle East, and the Saudis are leading a charge to put in even
more capacity. So extra Iranian refining capacity is not really needed. In
refined products, they’ve lost the regional race to Saudi Arabia, and if Iran
puts a refinery anywhere, it should be in Asia.
From a comparative advantage
point of view, the Iranian government should be concentrating on pumping crude
and using the proceeds to import gasoline and buy other nice things... like
infrastructure and technology that will be useful to Iran after the crude is
The only reason for Iran to
expand its refining capacity is the political factor, not the economic factor.
In other words, U.S. sanctions
are distorting the free market in trade and investment in the Iranian petroleum
industry. On the whole, we’re the ones fighting the invisible hand of market
economics, not Iran.
And maybe that’s why it seems
the U.S. is losing the sanctions fight.