For the sake of the Iranian people and global stability, we need to lead the effort in suppressing oil prices beyond what Tehran can bear.
By David B. Rivkin Jr. and Nawaf E. Obaid, January 7 2018 in USA Today
Mass protests are gripping Iran as its people express their discontent with crippling poverty, governmental corruption, and Tehran’s highly expensive sponsorship of terrorist proxies around the Middle East. The protests are geographically widespread, rural and urban, and challenge the very sinews of Iran’s mullahcracy. The United States can and should support Iranian freedom by pressuring the regime at its most vulnerable point, oil revenues. This strategy should have long- and short-term components, both designed to decrease global oil prices.
Iran’s dire economic situation is at the heart of this discontent. As President Rouhani acknowledged, the government cannot meet payroll and is seeking to increase revenue and decrease expenditures. Since 80% of Iran’s budget comes from petroleum exports, the quickest and surest way to bring about regime change in Tehran is a broad campaign to reduce current global oil prices.
In order for Tehran to balance its budget, oil prices need to be around $130 per barrel, over twice what they are today. Several factors — including government-promised subsidies to wheat farmers and debt payment obligations that are headed toward default — are pushing Iran to the financial breaking point. Add to this the rising costs of Tehran’s military establishment, and the mullahs’ expanding commitment to fomenting chaos around the Arab world, and you have a recipe for financial meltdown. The doomsday scenario could only be avoided by a major rise in oil prices that would allow Iran, with 10% of proven global reserves, to rescue itself.
For the sake of the Iranian people and global stability, this cannot be allowed to happen. Washington should lead the effort. Tehran is a major American foe and a successful anti-mullahcracy effort would both improve Middle East security and enhance US global credibility.
There are four ways to suppress further the current low global oil prices. First, the ad hoc understanding between Saudi Arabia and Russia, the world’s first and second largest oil exporters respectively, to curtail oil output would need to be suspended. This would enable the Saudis, who have the highest spare capacity of any nation, to increase exports, driving down prices. Moscow would hate losing its key Middle Eastern ally and wouldn’t countenance such a suspension, but it cannot stop the Saudis, for whom Iran is also a major adversary.
Second, the United States should continue with its long-term efforts to increase both the U.S. oil output — which it has already done by just announcing a major expansion of offshore oil drilling — and increasing U.S. capacity to export oil and petroleum products by building additional pipelines and terminal facilities. While these efforts would exert some downward pressure on prices, they would need to be supplemented by the short-term measures, that are capable of having an immediate pricing impact. The key such measure would be an agreement between the United States and a Saudi-led coalition (along with UAE and Kuwait) to increase output, bringing the price down by at least $10 per barrel. Further, because Tehran suffers from a lack of indigenous capital and technology to increase sustained production capacity and hence oil exports, this same coalition should convince the few oil companies willing to invest in Iran’s upstream industry to put their efforts on hold.
Finally, because Tehran lacks access to foreign financial markets and American banks view investing in Iran as too risky, its only hope is in European, and to a much lesser extent Asian, banks. The Trump administration should send a strong message to European and Asian banks that their access to U.S. capital markets will be endangered, if they float credits to Tehran in any form.
One might ask why Saudi Arabia, a nation that also depends heavily on oil revenues, would support a lower price. The answer is simple cost-benefit analysis. Blocking Iran’s drive for regional hegemony is the kingdom’s highest foreign policy priority. The Saudis are spending tens of billions of dollars attempting to stabilize nations such as Lebanon, Bahrain and Palestine and fighting wars in Yemen and Syria against Iranian destabilization efforts. Not only are the Saudis eager to shrink these expenditures, but with about $500 billion in foreign reserves and one of the cheapest oil extraction costs in the world, they can withstand lower petroleum prices for years if necessary. In short, the regime change that low oil prices would bring in Iran represents a vital foreign policy boon and overall financial savings over the mid to long-term for the kingdom.
Tehran simply cannot survive a sustained $50 per barrel price. All those wishing to bring an end to the decades of widespread terror caused by this so-called Islamic Republic, and support the Iranian people in their own demands for change, should commit to the above-mentioned measures. Only the oil weapon can end this repressive regime.
David B. Rivkin Jr. served in the Departments of Justice and Energy and the White House Counsel’s Office during the Reagan and George H. W. Bush administrations. Nawaf E. Obaid, a visiting fellow for intelligence & defence projects at Harvard’s Belfer Center, is a former advisor to the Saudi government.