Iranian Gas Sanctions Seem Inevitable...Will They Work?

Each day, it seems more and more likely that the US will impose new sanctions on Iran. The US started discussing the possibility with Israel and European allies almost a month ago. Congress has been enthusiastic about a new bill, called the Refined Petroleum Sanctions Act, that would attempt to block Iranian imports of refined gasoline. According to a New York Magazine article:

a bill imposing penalties on companies that export refined petroleum to Iran...already has 72 Senate co-sponsors and 294 in the House. For now, congressional leaders are just waiting for a green light from the White House before they proceed.

That green light will likely come soon. As we mentioned in a previous blog post, Obama has (foolishly) set a September deadline for negotiations with Iran. Although the IAEA says Iran is fully cooperating, the US is not satisfied. The US insists that Iran should not be allowed access to the full fuel cycle and must suspend its enrichment activities.

Political factors make a new round of sanctions even more likely. First, Obama is facing intense political pressure. Along with a large group in Congress, Clinton and Gates have advocated a more hard-line policy. When Obama came to office, he promised engagement. However, he has gradually backed off that commitment. He began by imposing an end of the year deadline for progress in negotiations, and later pushed that up to September.

Second, Obama is facing pressure from Israeli leaders who strongly oppose allowing Iran to access the full fuel cycle. Reports are surfacing that Obama may have made a deal with Israeli Prime Minister Benjamin Netanyahu. According to these reports, Obama promised to pursue more aggressive measures to counter Iran's nuclear program in exchange for Netanyahu's commitment to pause construction of settlements and engage in peace talks with Palestine. According to an editorial in The Age, the agreement included a promise that the US would pursue gas sanctions:

Mr Obama has engineered this apparent diplomatic coup by pursuing the high-risk strategy of linking a settlement between the Israelis and Palestinians to the curtailing of Iran's nuclear ambitions. The US is reportedly ready to impose punitive sanctions on Iran's oil and gas industry, in return for an Israeli undertaking not to launch a military strike against Iran, and an as-yet unspecified partial freeze on Jewish settlement activity in the Palestinian territories.

There is still the possibility that Iran will agree to US conditions and suspend its enrichment program before the end of September. However, according to the New York Magazine article cited above, Iran's leadership is unlikely to participate in meaningful negotiations anytime soon:

But don’t expect sincere offers by then from Iran’s Supreme Leader Ayatollah Ali Khamenei or President Mahmoud Ahmadinejad. The two are in a struggle for political survival, ramping up their anti-Americanism to portray reformist critics as foreign stooges. And even if Obama is still willing to talk, Tehran may be too internally divided to serve as a reliable negotiating partner.
Leadership is being forced to reprioritize to maintain their authority. Not a time when Iranian leaders want to discuss their nuclear program. Especially when, all along, iran has argued that they are in compliance with the IAEA inspectors and do not have a nuclear weapons program.

Therefore, it is likely that by the end of September, the US will pursue a new round of sanctions against Iran. Sanctions proponents argue that, although Iran has expansive oil reserves, they have limited refining capacity. As a result, Iran has to import a lot of gasoline. Proponents argue that limiting, or increasing the cost of, gas imports will severely slow Iran's economy. Facing harsh economic conditions, people in Iran will turn against hardliners like Ahmadinejad and demand an end to the nuclear program. There is bipartisan support for this proposal in Congress and it has found support in recent articles.

There are two obvious concerns with this approach. First, can US gas sanctions raise costs enough to put pressure on Iran?

It is unlikely that the US will be able get support from Russia and China. These two countries are critically important because they can veto UN sanctions at the Security Council. They also have extensive economic investments in Iran. Therefore, they will likely point to recent conciliatory gestures made by Iran to justify blocking sanctions. Furthermore, Michael Klare argued in a recent piece that enforcement of sanctions on gas would require a naval blockade of the Persian Gulf that would surely put-off Russia and China.

However, without Russia and China, it's still possible that US sanctions could put enough pressure on Iran. A recent Reuters article points out that:

"Sanctions just make it more expensive and uncomfortable," said Al Troner, managing director of Asia Pacific Energy Consulting. "That's what you saw with South Africa and to some extent Saddam Hussein's Iraq. The flow would continue but players would take on substantial financial and political risk."
Higher import costs would impact the budget, which could hurt President Mahmoud Ahmadinejad. Government subsidies make Iran's gasoline among the cheapest in the world. If imports cost more, more of the budget would be spent on those subsidies, leaving less cash to finance Ahmadinejad's populist programs.

Therefore, even if some gasoline flows into Iran, companies will be required to take increase risks which will increase gas prices enough to cause problems for Iran.

Another argument advanced by Michael Jacobson and Mark Dubowitz is that, even without Russia and China, US gas sanctions could be effective by focusing on insurance and reinsurance companies that underwrite the gasoline shipments to Iran. As a result, large energy companies would not be able to get insurance for their tankers going to Iran

However, even this seems problematic. Certainly, some insurance companies (those who do a lot of business with the US) would decide not to provide coverage to tankers sending shipments to Iran. However, others (companies based in China or Russia that don't do a lot of business with US companies) could decide to sacrifice the US market and increase profits by continuing to deal with Iran. Even if few of these companies exist now, a new US sanctions policy would create an incentive for new companies to emerge and take advantage of the large Iranian market. With so many economic connections between Russia and China and the oil and gas industry in Iran, it is easy to see how this policy could fail.

Another problem is that each of the arguments presume that Iran is reliant on gasoline imports, which may not be the case. According to Gal Luft, in a Foreign Policy article:

There is just one problem: Iran is much less vulnerable to gasoline sanctions than is commonly believed on Capitol Hill, and its foreign gasoline dependence is dropping by the day.
The little-known reason is that President Mahmoud Ahmadinejad has imposed dramatic measures to eliminate this strategic vulnerability. He has massively expanded the country's refinery infrastructure. Seven of Iran's nine existing refineries are undergoing expansion projects; seven new refineries are on the drawing board or already under construction. In three to five years, these projects will double Iran's refining capacity, putting it on par with Saudi Arabia.
These efforts, in addition to an effective petrol rationing scheme, have slashed Iran's need to import petroleum products. As of this fall, Iran's daily gasoline dependence will stand below 25 percent. This figure is expected to decline even further to roughly 15 percent over the next year as new refining capacity comes online. By 2012 Iran is projected to be gasoline self-sufficient; shortly after that, the Islamic Republic is likely to become a net gasoline exporter.

Later in the article, Luft points out that Iran is increasing investment in alternative energy and is one of the largest producers of methanol, both factors that will limit the effectiveness of sanctions.

It seems unclear whether or not gas sanctions would do enough economic damage to threaten Iran. However, even if sanctions do raise cost, a second concern is: will sanctions turn the Iranian people against Ahmadinejad? Or will they "rally-around-the-flag"and backlash against the US?

Advocates of sanctions argue that now is the perfect time to pursue a new round. Iran's economy is weak and its leadership is in crisis. According to an Asian Times article, this is the reason Congress and the Israel lobby has been pressing sanctions.

This is the weakest part of the argument for gas sanctions. If Iran’s economy starts to slow down because of sanctions imposed by the US, it seems more likely that people in Iran would blame the US than Ahmadinejad. In the past, US sanctions and threats of military strikes have helped Ahmadinejad consolidate power. In an op-ed in the New York Times, Hossein Askari and Trita Parsi argue that proposed gas sanctions are likely to have the same effect:

If the back of the Iranian economy is broken, the first casualty will be hope. Economic misery will kill people’s faith in a better future. The result will be political apathy. And rather than blaming Mr. Ahmadinejad, Iranians are likely to blame the United States.
Moreover, Iran’s ruling hard-liners are in disarray. The politics of fear is their bread and butter; they have long benefited from invoking foreign plots and Washington’s discredited regime-change policy. But now — with President Obama’s new outreach to Iran — the hard-liners have lost their 9/11. President Obama has deprived them of their perennial boogeyman.
This has helped the opposition find the maneuverability to challenge Iran’s vote-robbers. The hard-liners have no credible threat to rally around. Their disgraceful show trials on Iranian TV reveal their desperation. This has not only allowed fissures between various factions in Iran to grow, but also increased tensions among the conservatives themselves.
Mr. Ahmadinejad is desperately in need of a threat to help consolidate his conservative base and lend credibility to accusations of conspiracy against his moderate opposition. Imposing a gasoline embargo could be his last, best hope. Congress and the White House should think long and hard before throwing a lifeline to Iran’s vote-robbers.

As Parsi has argued before, the best decision may to a tactical pause. The US could allow the IAEA to continue with inspections to ensure that Iran does not attempt to acquire nuclear weapons, while holding off on additional sanctions or negotiations. Without an external enemy, Ahmadinejad would be held accountable for the problems in Iran, which would likely increase the influence of moderates. After a few months, the US could resume negotiations at a time when there is more stability in the Iranian leadership. While a course like this seems promising, it is increasingly unlikely. Facing pressure from Congress and Israel, Obama seems ready to support gas sanctions. Politics is preventing the best policy from emerging.