BICOM

Key points

• Iran’s acquisition of nuclear weapons would not only change the strategic balance in the Middle East and beyond but would also pose serious threats to the British economy.
• Due to its mismanagement of its economy and oil industry, Iran has an interest in maintaining oil prices as high as possible, maximising revenue for every barrel sold. This is in contrast to other oil producers in the Gulf who have a long-term interest in preventing prices becoming too high or unstable.
• A nuclear arsenal would increase Iran’s leverage over other oil producing states in the Gulf, potentially influencing their strategic orientation and energy trade policies, and forcing up the cost of oil.
• Becoming the first nuclear power in the Gulf would also likely lead other regional powers to seek nuclear weapons, creating a poly-nuclear Middle East. Such scenarios are likely to raise uncertainty in the oil markets.
• Given the UK’s exposure to international oil markets and its reliance on a healthy international economy, higher oil prices would be a double blow to Britain’s economic prospects.

Introduction

Many of the security threats posed by the potential Iranian acquisition of nuclear arms are well known, but much less attention has been paid to its impact on the global economy and Britain’s economic interests. What would be the economic impact on the United Kingdom if Iran acquires nuclear weapons? This paper argues that Iran’s acquisition of nuclear weapons would pose serious threats to the British economy, whilst Britain is already struggling to cope with the global economic downturn. At the broadest level, nuclear weapons would give Iran increased capacity to manipulate oil markets and raise prices, adding an additional economic burden on a world already facing huge economic difficulties.

Iran’s interest in high oil prices

Iran’s main aim in developing nuclear weapons is to strengthen its military and strategic position but it may also help to strengthen it economically. Iran has a strategic interest in high oil prices that differs from that of other Gulf oil producers. Domestic mismanagement of the oil sector, and the economy generally, as well as international sanctions, have limited the quantity of oil that Iran produces and exports. Iran is unable to increase its production with ease and so wants to maximise revenue per barrel sold. Maintaining tension in the Gulf and in the Middle East more generally and threatening to restrict the oil exports of its neighbours are ways of achieving this and also mitigating some of the considerable costs of Iran’s nuclear programme itself. Obtaining nuclear weapons, by increasing tensions in the Middle East and beyond, would serve this objective well.

Arab oil producers in the Gulf maintain good relations with Western countries as well as with their key markets in Asia: China, Japan, South Korea and India. These producers, especially Saudi Arabia, have a supreme interest in selling their oil and see stable market conditions as a pre-condition for that. While these other producers benefit from high prices, unlike Iran they do not want prices that are too high or unstable, which would encourage, in the long run, the development of alternative energy sources or alternative technologies that are significantly less energy dependent.

Iran’s threat to other gulf producers

Iran perceives itself as the natural hegemonic power in the Gulf, and seeks to dominate its smaller Arab neighbours. It competes with Saudi Arabia in particular, the largest of its Arab neighbours, for dominance by trying to exploit divisions between and within the Arab states in the Gulf. Tensions peaked in 2011 when Iran denounced Saudi Arabia after the Saudi military entered Bahrain to help quell protests by Bahrain’s Shia majority against its Sunni rulers. Also in 2011, US authorities accused Iran of attempting to assassinate the Saudi ambassador in Washington.

There is a sharp mutual antipathy between Iran and the Arab states in the Gulf, based on doctrinal as well as strategic orientations. Iran is run by a radical Shia Islamist regime, with a fiercely anti-Western ideology, which regards the United States as its primary enemy. Its Arab neighbours are run by conservative Sunni monarchies that look to the US a guarantor of their security, and in the cases of Bahrain, Qatar, Kuwait and Oman, host large American military bases which facilitate US regional dominance.

Iran would like to see its neighbours distance themselves from the US and proposes an alternative security infrastructure under its leadership and without external powers.  The Arab states in the Gulf vary in the extent to which they are ready to accommodate Iran, depending on their own circumstances.

If Iran were to acquire nuclear weapons it would become the first nuclear power in the Gulf and in OPEC. Quite apart from the impact on the credibility of the Non-Proliferation Treaty (NPT) of which Iran is a signatory, it would instantly increase Iran’s leverage over its neighbours. If Iran were to remain the only nuclear power in the region it would inculcate a degree of strategic superiority which could lead to military adventurism. Iran has a history of using subversion and terrorism against other states in the region, and it is likely to become more assertive against its neighbours if it has a nuclear deterrent. Iran might support opposition groups or sponsor acts of terrorism in neighbouring countries to compel them to deny requests for access or basing, by the US and other Western powers. The increased threat posed by Iran following the acquisition of nuclear weapons might make some of the other Gulf States – vulnerable to Iranian subversion – more likely to toe Iran’s line by, for example, limiting their exports, which would increase international oil prices.

For this very reason, if Iran acquires nuclear weapons, Saudi Arabia, in particular, will be tempted to purchase or develop nuclear weapons of their own, as will other regional powers such as Egypt and Turkey. A poly-nuclear Middle East would also be a recipe for increased uncertainty. The factors that stabilised strategic balance during the Cold War are absent in the Middle East. The stability of the Cold War, such as it was, was based on two superpowers with the capacity of mutually assured destruction (MAD), not on small nuclear arsenals in the hands of several countries, as is likely to emerge once Iran has nuclear weapons. During the early years of the Cold War, before the US and the USSR developed the capabilities for mutual destruction and the command and control mechanism to prevent such a catastrophe, the danger of both nuclear war and local conflicts under the ‘umbrella’ of nuclear deterrence was considerable.

In the Middle East the potential for nuclear error would be greatly increased. Nuclear posturing by one party will not be interpreted only by the party it was intended for but by all other parties. Regimes in the Middle East have shown a much higher predilection for brinkmanship than the US and the USSR ever did. It also cannot be assumed that Iran’s radical leadership will always act rationally, or that Iran would not share its nuclear technology with others.

Iran’s threat to oil supplies

Iranian officials have repeatedly threatened to interrupt the export of oil from the Gulf, and there is an oft-cited fear that they may do so in response to military action against its nuclear facilities. In the long-run however, such threats would have greater credibility after Iran acquires nuclear weapons, since the deterrent they provide would give Iran a freer hand to act than they now have.

Iran’s conventional offensive options are limited because of the poor condition of its ground forces, although it could launch limited air strikes on neighbouring states. Its main conventional threat is the naval threat it poses to the flow of oil from the region. Iran’s naval forces – including mines, missiles, boats and submarines – could temporarily close the Strait of Hormuz, or restrict passage through it. The Strait, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea and is the world’s most important oil chokepoint. In 2011 it had a daily oil flow of almost 17 million barrels, equal to 35 per cent of all seaborne traded oil, or about 20 per cent of oil traded worldwide. Every day some 14 crude oil tankers passed through the Strait, with a similar number of empty tankers entering to pick up new cargos. More than 85 per cent of these crude oil exports go to Asian markets, with Japan, India, South Korea, and China being the most important destinations. The Strait is only 21 miles wide at its narrowest point, but the width of the shipping lane in either direction is only two miles, separated by a two-mile buffer zone.

As well as closing the Strait of Hormuz, Iran could conduct limited amphibious operations to seize islands or offshore oil and gas installations belonging to other Gulf states. Nearly 20 per cent of Abu Dhabi’s oil is off shore, as is much of Qatar’s gas in a field shared with Iran. There are dozens of installations that could be attacked, including harbour facilities, offshore oil platforms and terminals and ships in ports throughout the lower Gulf, disrupting oil production and maritime traffic.

The US currently has a major military presence in the Gulf to secure the region and protect the flow of oil. It has air and army bases in Kuwait; air and command and control bases in Qatar; the US 5th Fleet in Bahrain; preposition and contingency facilities in Oman and cooperation agreements with Saudi Arabia and the UAE. Along with the UK and France it supplies all the GCC states with weapons. However, with nuclear weapons Iran could take steps to disrupt the flow of oil with greater impunity, since their nuclear capability would deter, to some extent, an effective response by its neighbours, or intervention on their behalf by other powers.

Closure of the Strait of Hormuz would require the use of longer alternate routes at increased transportation costs. While this oil does not reach the UK, interruptions or even threats of interruptions to this flow affect international oil prices, including those paid by the UK for oil from other countries.

Oil price instability and the UK economy 

As shown in the graph following, UK oil production has been falling for over a decade as resources from the North Sea oil fields have dwindled. This has resulted in a decline in exports and to a modest increase in imports. In 2010, about 63 per cent of UK oil came from Norway, 10 per cent from Russia, 16 per cent from OPEC (which includes Middle East sources) and the balance from other countries.

The cost of these imports has risen sharply. In 2000, the value of UK imports of crude oil and refined oil products was £9 billion, or four per cent of total UK imports. In 2010 it was £36 billion or ten per cent of total imports. The UK has therefore become much more exposed to fluctuations in international oil markets. There are also indirect effects. Higher oil prices push up costs throughout the economy and result in a larger import bill and faster inflation. This slows growth and increases unemployment.

Higher oil prices also similarly affect the international economy, including Britain’s trading partners, and therefore pose a significant threat to UK exports. In 2012, the European Commission estimated that a $20 rise in the price of oil would reduce EU GDP by 0.4 per cent in the first year and by a further 0.6 per cent in the second year. Inflation would rise by 0.6 per cent and 0.3 per cent respectively and unemployment would rise by 0.1 per cent and 0.3 per cent.

The International Monetary Fund has stated that the effects of major supply disruptions on the international economy would be particularly damaging under current conditions because there is limited spare capacity to increase oil production, and oil stocks in importing countries are low. A rise in prices would compound the difficulties facing many already suffering in the financial crisis, by adding to the pain inflicted by high unemployment and low wages.

Conclusions

The idea that a nuclear Iran would be more restrained in its behaviour than it is currently is, at best, a dubious assumption and, at worst, a dangerous illusion. With nuclear weapons, Iran would become much more powerful militarily and finally compensate for its weaknesses in conventional arms. This would give it much more muscle in the Gulf, in the Middle East, in OPEC and globally. Along with its support for international terror (and its direct participation in terrorism), nuclear weapons would provide Iran with protection from attack. This would help to maintain tension and serve Iran’s interests in keeping oil prices up.

It would also likely lead to other states in the region seeking nuclear weapons, creating a poly-nuclear region with all the attendant uncertainty for the region and the oil markets. Given the UK’s exposure to international oil markets and its reliance on a healthy international economy, higher and more unstable oil prices would be a double blow to the economy. Curbing Iran’s hegemonic regional ambitions and preventing it acquiring nuclear weapons is therefore not only an imperative for global security, but for protecting Britain’s economic interests.

 

Dr. Paul Rivlin is a Senior Research Fellow at the Moshe Dayan Center for Middle Eastern and African Studies at Tel Aviv University. He is the author of five books and numerous papers, chapters, and monographs on Middle East economics.

© BICOM 2012 All rights reserved. The opinions expressed in this report are those of the author and not necessarily those of BICOM.

Download PDF