1. Washington and Tehran don't agree on much these days. But in their conflict over Iran's nuclear program, both seem willing to use oil as a political weapon.
2. The U.S. believes that sanctions on Iran's energy exports might force Tehran to renounce its uranium-enrichment ambitions. Iran hopes its threats to withhold some or all of those exports will persuade the international community to back off.
3. If the two sides can't agree on who would be punishing whom by playing the oil card, the likelihood of diplomatic resolution may be even more remote than is commonly accepted.
4. One thing is certain: a substantial reduction in Iran's energy output would have a significant impact on global oil prices. Iran is the fourth-largest oil exporter in the world, behind only Saudi Arabia, Russia, and Norway. It sells more than 2.5 Million barrels a day and is believed to have about 10 percent of the world's proven reserves. Many analysts say a supply cut could combine with other market pressures to quickly drive prices up to $80 to $100 a barrel.
5. Is either side bluffing? Iran's threat to pull oil off the market is not an empty one, Iran's leaders—who want to visibly assert their defiance of the West, need domestic support for the regime, and divide international opinion—have only the country's energy exports with which to influence the outcome of the diplomatic conflict.
6. Of course, were Iran to completely cut off its oil supply, it would badly damage its own economy. In addition, a total shutdown would harm many of Iran's friends, though it would also increase oil income for those who are net exporters of oil (such as Russia and other OPEC members).
7. But there are a number of incremental steps Iran can take that would rattle those who depend on affordable energy without sinking its own economy. If Iran cut 200,000 to 300,3000 barrels a day, oil markets would react not only to the fall in supply but also to fears of what Tehran might do next.
8. The U.S. isn't bluffing either. Although Iran is a net exporter of oil, it is a net importer of refined products. Washington calculates that if it could cut off the supply of those products, including gasoline, Iran would be unable to build new refineries quickly enough to keep pace with growth in the country's demand, estimated at more than 5 percent a year. And a boycott of Iranian exports, it figures, would hurt Iran more than it would hurt the U.S.
9. Iran is unlikely to use its oil weapon first. But if the U.S. were to impose punitive measures—either through the United Nations Security Council or with a smaller coalition of nations——Iran would probably retaliate. And if a limited supply cut failed to ease international pressure, Iran could up the ante by cutting off supplies to a U.S ally. One possible target: resource-poor Japan, which imports 16 percent of its crude from Iran.
10. Then there is Iran's trump card. If Tehran believes that a U.S. or Israeli air strike against one of its nuclear facilities is likely, it might well stage military maneuvers in the Persian Gulf to remind the world that it can obstruct the flow of 20 percent of the planet's oil supply at the strategically vital Strait of Hormuz. Such a threat was recently made by Interior Minister Mostafa Pourmohammade and, it followed through, could interrupt the global supply chain and trigger a sharp and immediate spike in oil prices.
11. Some analysts argue that it is less dangerous for Washington to simply accept a nuclear Iran than to risk the damage that sharp Iranian production cuts—or Iranian retaliation against a U.S. or Israeli military strike—might do to U.S. interests.
12. But the Bush administration fears that Iran might use its nuclear program to assert political dominance in the region and sell nuclear material and expertise to other states, and possibly to terrorist groups.
13. The U.S. will continue over the next several months to try to push sanctions through the Security Council. But the council is increasingly unlikely to impose them.
14. If the Bush administration decides it cannot use the UN process to compel Iran to back down, it will probably look for other levers of political and economic coercion, including attempts to recruit a "coalition of the willing" that is prepared to temporarily cut energy and other commercial ties with Tehran. The success of such a coalition strategy would depend on the number of countries willing to join.
15. Iran and the U.S. have agreed to face-to-face talks on the situation in Iraq. Although Iran says its nuclear program will not be on the agenda, the U.S. is sure to broach the subject and to search for any slack in Tehran's bargaining position.
16. It is unlikely to find any. Iran's willingness to talk has more to do with efforts to convince a domestic audience that it has become the go-to power on regional issues and to show that U.S. attempts to stabilize Iraq aren't going well.
17. When the nuclear subject is raised, the two sides are likely to reiterate their mutually exclusive positions, raising the danger that the meeting could end up hardening mutual mistrust. Though they agree that oil makes for an effective weapon, Tehran and Washington don't see eye to eye on anything else. And that's bad news for those who hope to head off substantial upward pressure on oil prices.