Why Iran Is Driving Oil Up

Shahpour Madani, feeling flush, was cruising electronics shops on Tehran's Jomhuri Street earlier this month for a flat-screen digital television. He figured he could afford either a sleek new Sony, or a refrigerator for his wife. Decisions, decisions. "I haven't had so much money in a long time," said Madani, an accountant at the Ministry of Agriculture who got a raise last month and bonuses in March. "It's really fun to watch soccer games on a big TV." And there were so many home-entertainment possibilities to choose from. Up and down Jomhuri Street, you see masses of Malaysian DVD players, Japanese sound systems, Chinese VCRs, a consumer paradise the likes of which Iranians haven't come across for decades.

Of course, what you're really looking at is oil money that's been turned into the kinds of goods that keep people happy, or quiet, or both. While cutting back controls on imports, Tehran has jacked up salaries, pumped up pensions and doled out extra benefits from charities like the Imam Khomeini foundation. For Iran's body politic, the cash infusion is like a drug. With the enormous surge in world petroleum prices, about $50 billion was injected into the country last year alone. And if the government's spending has created a kind of public euphoria, it's also creating an addiction. Some Iranian economists talk of a "disease." What's certain is that the regime's pathological craving for continued high oil prices has become a key factor in the crises that President Mahmoud Ahmadinejad is helping to fuel, from the showdown at the United Nations over Iran's nuclear program to the exploding cost of a gallon of gas. Many factors are to blame for high oil prices--but Iran's increasing dependence on those revenues looms large among them.

The global oil market is extremely tight. About 85 million barrels are burned up every day, and that's sometimes just a little more or less than the whole world can manage to pump out of the ground. "We're in an era of just-in-time production capacity," says David Fyfe, an expert on oil supplies for the International Energy Agency in Paris. Any supply disruption--or potential disruption--makes traders jump out of their seats and prices go through the ceiling. Hurricanes in the Gulf of Mexico, guerrillas in Nigeria, political grandstanding in Latin America, war and sabotage in Iraq: all have helped propel the vertiginous price rise from less than $20 a barrel at the end of 2001 to more than $70 a barrel today.

But as a price pusher, Iran is in a class by itself. The country has the second largest proven oil reserves in the world, and on a good day exports about 2.5 million barrels. Think about a confrontation that threatens to cut off those supplies: say, talk of U.N. sanctions, speculation about Iranian retaliation, rumors of war. All have been part of the international chorus since Ahmadinejad came to office last August and announced that Iran would crank up its nuclear research. No wonder the markets are twitchy.

Now look at Iran's neighbors, especially Saudi Arabia, which has the largest proven reserves in the world and is currently pumping about 9.6 million barrels a day. Much of its oil, as well as production from Kuwait, Bahrain, Qatar and the United Arab Emirates, passes through the Strait of Hormuz, which runs along Iran's southern shore. Threaten these suppliers or supply routes and you can really make the market jump. Thus statements like the one from Iranian Interior Minister Mostafa Pourmohammadi a few weeks ago when asked about threats from the United States: "We're rich in energy sources. We have the control of one of the main energy routes in the world. If they want to use any other option, they have to know that our potential is not lower than theirs."

Tehran's rhetoric is calculated. Iran has pursued its nuclear program behind the shield of high prices, and so far the policy has worked. At the United Nations Security Council not a single member, including the United States, has proposed boycotting Iranian oil. And while Washington may not have taken military options off the table, it hasn't put them on it, either. The mullahs, who are first and foremost interested in the survival of their regime, have gambled that eventually they can replace their oil shield with a nuclear one--and meanwhile the petro-billions will just keep rolling in.