Roger Stern*
Edited by Ronald W. Jones, University of Rochester, Rochester, NY, and approved October 31, 2006 (received for review May 16, 2006)
The U.S. case against Iran is based on Iran’s deceptions regarding
nuclear weapons development. This case is buttressed by assertions
that a state so petroleum-rich cannot need nuclear power to
preserve exports, as Iran claims. The U.S. infers, therefore, that
Iran’s entire nuclear technology program must pertain to weapons
development. However, some industry analysts project an Irani oil
export decline [e.g., Clark JR (2005) Oil Gas J 103(18):34–39]. If such
a decline is occurring, Iran’s claim to need nuclear power could be
genuine. Because Iran’s government relies on monopoly proceeds
from oil exports for most revenue, it could become politically
vulnerable if exports decline. Here, we survey the political economy
of Irani petroleum for evidence of this decline. We define
Iran’s export decline rate (edr) as its summed rates of depletion and
domestic demand growth, which we find equals 10–12%. We
estimate marginal cost per barrel for additions to Irani production
capacity, from which we derive the ‘‘standstill’’ investment required
to offset edr. We then compare the standstill investment to
actual investment, which has been inadequate to offset edr. Even
if a relatively optimistic schedule of future capacity addition is met,
the ratio of 2011 to 2006 exports will be only 0.40–0.52. A more
probable scenario is that, absent some change in Irani policy, this
ratio will be 0.33–0.46 with exports declining to zero by 2014–
2015. Energy subsidies, hostility to foreign investment, and inefficiencies
of its state-planned economy underlie Iran’s problem,
which has no relation to ‘‘peak oil.’’
The U.S. has projected military force in the Persian Gulf for two
decades. The policy aims to preempt emergence of a regional
superpower (1). However, preemption of Iraq has been accomplished
only after two wars and an occupation. These costly
exercises have not slowed Iran’s procession toward regional superpower
status but rather may have accelerated it (2).
Iran’s rise illuminates a flaw in preemption policy. The flaw is
that force projection is not a remedy for the underlying economic
problem, market power. Oil cartel states exert market power to
collect monopoly rents. In a lawless region such as the Gulf, each
states’ rents are a potential war prize to another. If rents could be
aggregated by wars of seizure, a Gulf superpower would emerge, as
was Iraq’s aim in invading Iran and Kuwait. Yet, although U.S. force
projection prevents wars of seizure, rents still flow.
Force projection thus keeps a peace in which cartel states can
collect monopoly rents sufficient to attain near-superpower status,
evenwithout wars of seizure. Market power thereby perpetuates the
need for force projection, whereas force projection protects the
cartel states that exert market power. This paradox guarantees that
the U.S. militarywill remain in the Gulf until some policy is adopted
to reduce market power.
U.S. failure to confront market power is not an oversight,
however. It is a policy whose premise is that cartel states must be
appeased to secure their oil exports (3). This conception is based in
turn on the perceived threat of an ‘‘oil weapon’’ (4), a fiction U.S.
officials have believed for five decades. Whatever the shortcomings
of past policy, the present concern is how to prevent a terror sponsor
from attaining nuclear weapons or contain it if it does.
The U.S. case for action against Iran is based on its deceptions
with respect to the Treaty on the Nonproliferation of Nuclear
Weapons (NPT). However, this case is buttressed with assertions
about Irani petroleum:
Finally, there is Iran’s claim that it is building massive
and expensive nuclear fuel cycle facilities to meet future
electricity needs, while preserving oil and gas for export.
All of this strains credulity. Iran’s gas reserves are the
second largest in the world. [Yet] Iran flares enough gas
annually to generate electricity equivalent to the output
of four Bushehr reactors.†
Given the historic difficulties that U.S. policymakers have had with
petroleum economics, it seems possible that these assertions are
wrong. Iran is guilty of NPT deceptions, but it cannot be inferred
from this that all Irani claims must be false. The regime’s dependence
on export revenue suggests that it could need nuclear power
as badly as it claims. Recent analyses by former National Iranian Oil
Company (NIOC) officials project that oil exports could go to zero
within 12–19 years (5, 6). It therefore seems possible that Iran’s
claim to need nuclear power might be genuine, an indicator of
distress from anticipated export revenue shortfalls. If so, the Irani
regime may be more vulnerable than is presently understood. Here
we survey Iran’s petroleum economy for evidence of oil export
decline that might suggest such vulnerability.‡
Petroleum Sector Overview
Most Irani oil export revenues are monopoly rents, which comprised
63% of Irani state revenues in 2004 (4). Rents derive from
the difference between market price and competitive price, which
is the sum of marginal production cost plus return to capital. For
states like Iran that subsidize domestic petroleum demand, such
dependence can be problematic. If subsidies call forth demand
growth in excess of production growth, the exportable fraction of
production will decline.
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