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Interrupting Iran's Oil: The Price The West Can Now Afford

For many years, it seemed as if the West’s real plan for dealing with the Iranian regime was to talk it to death. Occasionally, a new round of sanctions would be announced, but they were never really very serious sanctions. Sure, they angered their targets in Tehran, but not enough to stop them from doing anything they really wanted to do. The world was willing to pay any price, bear any burden, to stop Iran from getting nuclear weapons. Any price, that is, except the only one which would have made a difference: interrupting the flow of Iranian oil.

The two sides disliked each other, but they were dependent on each other, so they attacked each other in relatively minor ways in public, while continuing to do business in private.

This latest round of sanctions, however, which included cutting Iran off from the global banking system, has been serious. Turkey has been forced to pay for Iranian oil by physically moving gold bars across the border in trucks, but most buyers have found it easier to simply buy their oil elsewhere. Over the course of the last year, Iranian oil exports have fallen by about 1.5 million barrels a day to under 1 million, less than half their previous level of roughly 2.5 million barrels a day.

Oil is Iran’s main export and source of foreign exchange -- providing money needed to pay for imports of food, gasoline, medicine, and many other necessities and luxuries. This is a serious economic blow. The rial is collapsing because there simply are not enough dollars coming in.

The severe inflation Iran is now experiencing is the result of the government’s attempt to make up for this lost revenue by just printing more money. Since printing money creates inflation -- because more money is chasing the same goods -- everything the government has to pay for is also made more expensive as a result, which means that they have to print more and more money each month just to keep up.

Centuries of sad experience show that this inevitably results in the sort of hyperinflation Zimbabwe has recently been experiencing. Inflation is a form of tax, which transfers wealth from individual people to the government printing the money. The problem is that each successive rial printed transfers a little less wealth than the last one did.

But what suddenly caused the West to change its behavior? New worries about Iranian nuclear progress? The problem with that explanation is that hawks have been saying a bomb was imminent for decades, and it never led to this before. Some sudden enthusiasm for an actual war with Iran, on the part of people like the current U.S. secretary of state? I, personally, find that very hard to believe.

The real reason the West intensified sanctions now was that they could, because the potential political costs of removing Iranian oil from the market have fallen dramatically with the recent increase of production in Iraq.

Iraqi oil production has gone from a low of less than 2 million barrels of oil a day at the height of the war, to almost 3.4 million barrels a day in September 2012. The Iraqis have a target of 4 million barrels a day by 2014, which, if the last year is any indication, they are quite likely to meet and perhaps exceed.

Costless Sanctions

The increase of 1.5 million barrels a day that has already occurred neatly matches the decline in Iranian exports over the last year. As a result, serious sanctions on Iran have gone from being politically impossible, to being almost costless. While the public narrative in American politics casts Iraq as South Vietnam and Iran as North Vietnam, making the Iranians the main beneficiaries of the war, the actual outcome has been a strategic disaster for the Iranians. Asking who is to blame for this is like asking whether it was the captain or the iceberg that sank the Titanic. The ice did the damage, but the captain carelessly steered the ship right into it.

The worst thing about this situation from the Iranian point of view has to be that it is potentially permanent. New Iraqi oil is not going away. The rest of the world could go on happily consuming oil from Iraq instead of oil from Iran forever, and never know the difference. That means Iran’s loss of export revenues may not be temporary.

What does this mean for Iran, politically? To make an analogy with the fall of communism in Eastern Europe, the mismanagement of the Soviet economy was masked in the 1970s and early 1980s by the high export prices it was getting for its abundant oil reserves. Then, in the mid 1980s the price of oil fell sharply, and the regime’s true fragility was exposed.

Like many people, I thought the painful end of the 2009 protests showed that the Iranian regime was simply too strong to be dislodged. But the collapse of the rial has made me see things rather differently. The regime is tactically strong, but strategically weak and vulnerable -- mainly because its confrontation with the West has been mostly financed by money that comes from the West.

The ability to enjoy the political advantages of having an outside enemy, without having to endure the hardships that self-isolated countries like North Korea and Burma and Cuba suffer, was entirely the result of the fact that the West liked Iranian oil more than it disliked Iranian policies. Now, that’s over. Iran now faces a choice between economic collapse and political change.

Revolutions, like financial crises, are contagious. Iranians, now, are like Eastern Europeans in 1990 in that they cannot easily be cut off from external sources of information. If their government's response to the crisis isn't effective, they will quickly cease to believe their explanations and reassurances. A severe crisis entirely narrated by your opponents is a very dangerous thing in politics.

Thailand and Indonesia in 1997, or the Russian ruble in 1998, are examples of what milder shocks can do to the economies of countries with much less serious current-account imbalances. Since the Iranian government shows no sign, from its response so far, of appreciating the seriousness of the economic situation -- and appears to be actively doing whatever it can to make things worse -- the current regime’s survival is suddenly in doubt.

The inability to import things like food and medicine and gasoline, combined with economic chaos, a collapsing currency, and eventually hyperinflation, all put together with a complete failure to come up with any sort of constructive response, are going to be very bad for the regime’s authority. A fatal deflation of state power, and a protest movement that succeeds where the protests of 2009 failed, are now not inconceivable as outcomes.

Daniel Cloud teaches philosophy at Princeton University. Before becoming a philosopher, he was a partner at Firebird Fund Management, which manages investments in Russia, Kazakhstan, and the other former Soviet republics. The views are the author's own and do not represent those of RFE/RL.