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Western nations are concerned that a nuclear Iran could pose a threat by using nuclear weapons against their cities or military bases or transferring nuclear materials to terrorists who might use a dirty bomb or other radiation type weapon against their civilian populations. The likelihood of the first scenario is low given the massive retaliation that would follow and, even the prospect of nuclear terrorism is not the fear driving the West's campaign to stop Iran's nuclear project. The primary motivation is oil.

Given that ensuring the supply of oil at a reasonable price is the principal national security interest of the United States and other Western countries driving their Middle East policies, this should come as no surprise. The fact that China and Japan and other non-Western nations are highly dependent on Middle Eastern oil has also made these countries allies in the effort to prevent Iran from building a bomb.

Iran's Oil Industry Hit By Sanctions

Prior to the imposition of sanctions against Tehran, Iran was the fourth leading oil producer in the world, after Saudi Arabia, Russia, and the United States, providing nearly 5% of the world's oil. Iran's influence in the oil market is likely to grow as it is also estimated to have the third largest proven oil reserves in the world after Venezuela and Saudi Arabia. Given these resources, it is in the West's interests to see the flow of Iranian oil continue.

Iran does not act independently in the oil market. It is a member of the Organization of the Petroleum Exporting Countries (OPEC), which as a group, supplies more than one-third of the world's oil. OPEC sets quotas for the amount of oil each member is expected to sell and by controlling a significant portion of the world's supply, can influence the price. A number of rivalries exist within OPEC, with some countries wanting to cut supply to boost prices and other preferring to keep prices stable. Iran and Saudi Arabia have been at loggerheads in recent years over the organization's quotas. Iran prefers low supply and high prices, especially as sanctions have bitten and undercut their revenues. The Saudis, on the other hand, generally prefer to moderate supplies for fear, in part, that any prolonged spike in oil prices will provoke Western nations to more aggressively pursue alternative sources of energy. Thus, when oil reached an all-time high in 2008 of $147 a barrel, the Saudis announced they needed a price of $75 to continue to earn enough profits to fund their spending without provoking any dramatic changes in U.S. energy policy. The following year, the average price of oil was $75 a barrel, thanks primarily to the Saudis pumping more oil.

Because the Saudis have the largest supply, they are the swing producer that can have the greatest impact on prices by turning on and off the spigot. Since the Arab spring began, the Saudis have pumped more oil to mitigate the potential impact of supply interruptions from countries like Libya and to offset the impact of sanctions on Iran. They have acted in their own self-interest, of course, to a) try to hurt Iran by depressing the price of oil and reducing Tehran's income; b) to discourage alternative energy production and c) to send President Obama a subtle message prior to his reelection that if he did not press the Saudis on freedom and democracy, as he was doing in other parts of the region, they would keep the price of oil low to help the U.S. economy. If Obama had spoken out about Saudi repression and human rights abuses, they could have let the price of oil rise, which would have thrown the U.S. into a deeper recession and probably doomed Obama's reelection hopes. Not surprisingly, the president has not called for democracy in Saudi Arabia or the other Gulf oil producers.

The Saudi actions have complemented the sanctions imposed by the United States and Europe to cutoff Iranian oil exports. The United States also implemented a law in February 2012 to prevent Iran from repatriating earnings it gets from oil exports. "Iran's oil revenues will largely be shackled within a given country and only useable to purchase goods from that country," according to David Cohen, undersecretary for terrorism and financial intelligence at the US Treasury Department (Reuters, July 12, 2012).

These sanctions were designed to reduce Iran's oil revenues to deny Tehran funds for its nuclear weapons program. After the oil embargo was imposed in June 2012, Iran has felt the impact, announcing in December that its oil revenues had fallen 50% from the year before (Reuters, December 16, 2012).

The sanctions would hit even harder, but the United States decided that it would ask countries heavily dependent on Iranian oil, primarily in Asia and Europe, to reduce rather than stop all their imports and, in exchange, exempt them from penalties U.S. law imposed on banks and other financial institutions in countries that continued to import Iranian oil. Twenty countries -- China, India, South Korea, Malaysia, Singapore, South Africa, Sri Lanka, Turkey Taiwan, Belgium, Britain, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain and Japan – received waivers from the United States (Reuters, December 7, 2012).

Despite holes and exemptions, sanctions did take a large bite our of Iran's 2012 oil revenues. Gholam Reza Mesbahi Moghaddam, head of the Majlis Budget and Planning Committee, said that the Majlis agrees with halving projected oil revenues in the 2013/14 Government budget. The 2012/13 budget was based on the export of 2.3 million barrels per day (bpd), but Iran’s sales fell to about half that amount. (FA News, April 1)

Connection between Iranian Bomb and World Oil?

In an effort to forestall sanctions and other measures to interfere with their nuclear program, the Iranians have made a number of threats against Israel and the West. In the case of Israel, Iran has threatened to destroy the country and to use its proxies in Lebanon and the Gaza Strip to rain missiles down on Israel's population. The principal threat against the West has been to interfere with the supply of oil such as mining the Persian Gulf and attacking oil tankers. The United States has made clear that any effort to interfere with the transshipment of oil through the Straits of Hormuz would cross a red line and trigger a vigorous reaction. To reinforce the U.S. warnings, additional naval assets have been moved into the Persian Gulf and, in September 2012, the United States and more than 25 other nations conducted the largest-ever minesweeping exercise in the Persian Gulf to demonstrate their unity and resolve to prevent Iran from attempting to block oil exports through the Strait of Hormuz.

A second concern is that if Iran obtains a bomb, it could directly threaten its Arab oil producing neighbors and potentially seize some or all of their oil fields. This would undoubtedly trigger a U.S. response, as occurred when Saddam Hussein move Iraqi troops toward the Saudi border and triggered Operation Desert Storm in 1991.

A less aggressive step, that would be more difficult for the West to counter, would be to intimidate the members of OPEC and coerce them to lower production quotas. One of the world's leading oil producers, Venezuela, is both an ally of Iran and member of OPEC and likely to support the Iranian position. Even with U.S. backing, the Saudis may be less willing to stand up to Iran and use its excess capacity to moderate the impact of any reduction of oil supplies.

The other way that an Iranian nuclear weapon can influence oil prices is by creating instability in the region, which typically causes speculators to worry about the security of oil supplies and to drive the price up. Saudi Arabia has countered this threat up until now by pumping more oil, but it may not be able to do so after Iran gets a bomb.

Ultimately, Western fears of a nuclear Iran revolve around the potential impact on oil supplies. If Iran has the power to influence supply, it will enrich Iran while simultaneously damaging the world economy at a time when many countries are already in financial distress. It is therefore in the interest of all the oil importing countries to ensure that Iran does not have nuclear weapons.