After failing to halt Iran's nuclear advances with harsh economic sanctions, a group of U.S. lawmakers and analysts is proposing a more drastic remedy: cutting off Iran entirely from world oil markets.
Advocates of the measure say increases in oil and gas production in the Middle East and North America have made it economically feasible to organize the first truly global boycott of Iranian crude. Such an effort, if successful, would sideline the world's fourth-biggest oil producer in an effort to force Iran to change its nuclear policies.
The proposal, variations of which are circulating on Capitol Hill, is being criticized by some economists as well as Obama administration officials who warn that such a measure could disrupt oil markets, alienate U.S. allies and drive up energy prices.
White House officials say they are exploring alternatives for further reducing the petroleum sales that provide Iran with the bulk of its foreign-currency earnings. At the same time, both the administration and Congress are pushing for new financial measures to close loopholes that allow Iran to collect hard currency — particularly gold — for its oil and gas.
Underlying the efforts is frustration over Iran's refusal to accept curbs on its rapidly advancing nuclear program, which U.S. officials fear will soon be capable of producing nuclear weapons. Sanctions already have slashed Iran's oil revenue by 40 percent in the past year. Now a number of lawmakers and analysts believe conditions are ripe for attempting a much deeper cut — to nearly 100 percent.
"If we're talking about things that could really hurt the Iranian economy, at the top of the list is taking their oil off the market," said a senior Senate aide involved in discussions of a proposal to require all countries to stop buying oil from Iran or risk losing access to the U.S. banking system. The aide, who insisted on anonymity in discussing internal Senate deliberations, described "strong interest, on a bipartisan level," in the plan.
Supporters have been buoyed by conclusions in an independent report co-authored by the economic research firm Roubini Global Economics and Securing America's Future Energy (SAFE), a Washington nonprofit group. The report says oil markets have loosened up significantly compared with five years ago, when rising demand from Asia strained global supplies and drove up prices. Today, sluggish European growth and increased oil production in Iraq and the United States have led to a surplus capacity of nearly 4 million barrels a day, the report says.
According to the report, the world market is capable of absorbing the loss of most or even all of the roughly 1.5 million barrels of crude currently exported by Iran — a prospect that would have been unthinkable even a year ago. While eliminating Iranian exports could cause temporary supply disruptions, "right now, the market would recover," said Paul Domjan, Roubini's managing director. "This is the best time to try to do it."
Other oil experts dispute that analysis. The level of spare crude production capacity is relatively low, said Robert McNally, head of the Rapidan Group consulting firm, and almost all of that spare capacity is in Saudi Arabia. While Saudi Arabia claims to be able to produce more than 12 million barrels a day, many analysts doubt that.
In addition, while the Roubini-SAFE report says oil prices have stabilized, they are at historic highs. The price of a basket of oil types produced by OPEC countries has averaged more than $100 a barrel for the first time ever in 2011, 2012 and the first four months of this year, according to OPEC data.
McNally, who favors a quarantine of Iran, says that there is no favorable oil market "window," but that the risks of a nuclear Iran outweigh any disruption to oil markets. He says the United States would need to release its Strategic Petroleum Reserve stockpiles to counter the loss of Iranian exports.
Cutting out Iran's oil exports also would require some diplomatic heavy lifting, including persuading Iran's remaining customers to switch to other suppliers and maybe pay higher prices. China, Japan, India and South Korea all rely on Iran, although they have reduced imports over the past year.
The administration has been nudging the four countries to further trim imports of Iranian oil, and some U.S. officials argue that it could be counter-productive to force drastic cuts that could harm economies and perhaps trigger a backlash against U.S. sanctions policy. For instance, China has been more supportive of diplomatic efforts by the P5-plus-1 group — the U.N. Security Council's five permanent members (U.S., Britain, France, China and Russia), plus Germany — to pressure Iran.
"There will be new sanctions, but we should not lose sight of the goal," said a senior administration official, insisting on anonymity to discuss internal deliberations of Iran policy. "The goal is to put pressure on Iran, not to pick fights with trading partners."
The proposal to drastically increase economic pressure also runs contrary to recommendations from a group of former senior U.S. diplomats and administration officials. They argue that sanctions have failed to change the regime's behavior. A report last month signed by 35 former U.S. officials noted the lack of results from 30 years of attempts to isolate and punish Iran. To some critics, the harsh sanctions seem intended more to hurt Iranians than change the country's nuclear policy.
"[I]t seems doubtful that pressure alone will change the decision of Iran's leaders," the report stated.
Still, the increased interest in tougher oil sanctions comes at a time when the administration and Congress both are looking to step up economic pressure on Iran. Last week, lawmakers introduced a bipartisan bill aimed at stopping Iran from gaining access to billions of dollars in euros kept in overseas banks — money that represents up to a third of its total hard currency holdings.
In addition, Congress is looking to crack down on what what some officials are calling Iran's "golden loophole," a weakness in current sanctions law that allows Iran to replenish its hard-currency accounts by acquiring gold through overseas markets.
"The point of sanctions is to create a currency crisis, but this loophole limits the effectiveness of our sanctions policy," said Mark Dubowitz, executive director of the Foundation for Defense of Democracies and co-author of a report on a Iran's gold transactions, as well as previous studies that laid the groundwork for a series of measures responsible for cutting Iranian oil exports by 1 million barrels a day.
In oil and shipping markets there are signs of sanctions success. According to an Argus Media newsletter, India's largest insurance company has cut coverage for Chennai Petroleum refineries using Iranian oil. Iran's state-owned oil company owns a 15.4 percent stake in Chennai, and Iran has tried to lure investment by Indian oil exploration companies by offering unusually generous production sharing deals.