Why Iran Nukes Could HELP the Economy

Jonas Max Ferris
One of the major downsides of high oil prices is the power and wealth it transfers to rogue regimes. Luckily for America and the world, North Korea doesn’t have any oil. Unfortunately, Iran does.

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Iran sits on an underground sea of black gold, 135 billion barrels by some estimates — perhaps 10 times what in theory could be extracted from the Arctic National Wildlife Reserve (ANWR) and around 12% of the world’s oil reserves. Only Saudi Arabia and Canada have more. Oil reserves are notoriously inaccurate, but these numbers are likely in the ballpark.

With oil near $70 a barrel, Iran rakes in about $150 million a day in pure profit, given the low cost of mideast oil production. That works out to roughly $50 billion a year for the Iran state-run oil industry. For a $180 billion dollar economy, that’s a big piece of the pie.

Iran is in a rare moment of strength, right up there with the OPEC oil embargo of 1973 and the hostage crisis of 1979. The global economy needs oil more than ever, and can’t lose access to the 2.5 million barrels a day Iran exports — about 5% of total oil exported from top world producers.

For reference, Iran’s total exports work out to about 75% of China’s total oil imports — and we’ve all heard how demand from China has boosted oil prices. Imagine another China magically appearing thirsty for oil — that’s about how tough it would be to global oil markets if we lost Iran exports. Good luck driving up international support for a boycott of Iranian oil. Not at $3.00 a gallon for premium unleaded.

In recent years, Iran has been able to sock away almost $50 billion in foreign reserves due to high oil prices. If oil prices stay elevated, Iran will surpass U.S foreign reserves soon.

In addition to their newfound economic might, Iran probably gains confidence assuming that the U.S. has their hands tied with the Iraq war. What better time to bring up their supposedly peaceful nuclear power initiatives? Are we going to invade them in an effort to halt their assumed but vehemently denied nuclear weapons initiatives? A country four times the size of Iraq? We’re 0-1 for finding WMD in the Middle East, so we might have a little trouble motivating the country for another go around.

As for global support, Iran has a few legitimate beefs. For one, Iran wastes some of the 1.5 million barrels of oil a day they consume in generating electricity. If they could make cheap nuclear power domestically, they could export more oil and natural gas (lowering world prices), and make more money. As global oil and other fossil fuels run out, they should be used for consumption that has little substitute — like mobile power in a car, or making chemicals and plastics — not generating power. Iran is doing the world a favor by selling off more production and switching to nuclear power at home — or so the logic goes.

Two, Israel probably has nuclear weapons. Why can’t Iran have nuclear power? Of course, once you go all vertical integration with nuclear power as Iran would like – from mineshaft to power generation — it’s much easier to make actual nuclear weapons. The argument that Iran has its own uranium to enrich doesn’t wash — unlike their global rank in oil reserves, they pale in comparison to countries like Australia and Africa when it comes to uranium reserves. Still, some countries may see it Iran’s way. Perhaps countries like Germany and Russia that have made money working on nuclear power plants in Iran in the past (while France made money selling nuclear reactors to Iraq).

So how does the world go about putting Iran back in a position of weakness? It won’t be easy.

Countries gain power by military or economic strength — though the latter is increasingly becoming more important. Russia is treated as more important than say, Italy or Spain, even though the Russian economy is smaller. Russia has military might, so it's still worth something in global importance. A few nuclear bombs in addition to one of the world’s largest oil reserves puts Iran in an strong position going forward. If you think Iran is getting too powerful now, imagine in a decade or two when the world really starts running out of oil.

Success in Iraq would help take Iran down a notch. If we found the makings of a nuclear arsenal in Iraq and the country was less violent today, Iran wouldn’t be saying a word about their nuclear ambitions. If our Army was idle stateside and oil was $20 a barrel, you wouldn’t hear a peep from Iran’s Supreme Leader.

Reducing Iran’s oil revenues would be a step in the right direction. Most state-controlled economies fail or flounder on their own, and wouldn’t necessarily require military attention to keep them in line. North Korea is in perpetual decay because their economy doesn’t generate enough income to afford their overzealous military spending. The Soviet Union ultimately went broke in similar fashion. If oil was $100 a barrel in the 1980s and other commodities equally high, the Soviets could have make billions selling their vast natural resources at inflated prices and still might be with us today. For this reason Iran’s oil gravy train needs to be addressed.

The U.S. has had economic sanctions against Iran for almost 20 years. While the U.S can now buy Iran’s rugs and caviar (go figure), most everything else remains off limits, notably oil.

U.S. sanctions against a country that primarily exports commodities are essentially useless — little more than political showmanship. With Cuba, where we still have cold war-era sanctions, there are more dire economic effects, as the huge U.S. citizen tourism trade was taken away from the country — and even then the economic damage was minimal. Most of Cuba’s damage is their own doing.

With a commodity like oil, Iran could care less if half the countries in the world won’t buy their output, as long as the ones that do need their total export. This is very different than, say, a boycott against Japanese cars in the U.S., which could cause a recession in Japan. If everyone but China boycotted Iranian oil, Iran likely wouldn’t miss one dollar of revenue. Oil prices are set globally by total supply and demand. This is why when we fill up our gas guzzlers (and I say "we" because I used to drive a ‘67 Cadillac), Iran makes a little more money from the resulting higher prices — even though we don’t buy gas directly from Iran.

A total boycott by all countries could work, in theory. Unfortunately, oil prices would rocket by perhaps $20 a barrel or until global demand lessoned by the 2.5 million barrels Iran sells daily. This would make global oil companies selling their own supply even more rich, along with other countries like Saudi Arabia and Venezuela. That is if such a supply disruption doesn’t cause a global recession — a distinct possibility.

A total boycott is very difficult to pull off because black markets develop and the product will find a way to market, often at higher prices. Let’s not forget that heroin is illegal worldwide, and Afghanistan still makes half their dough dealing in opium and heroin. Where there is a will… and with oil there most definitely is. Still, a global boycott could send a strong message, and make dealing in oil troublesome and costly for Iran. It could also prevent countries with nuclear know-how from helping Iran go nuclear.

One temptation is to increase our own oil supply to compete with Iran. While it would be good if global oil supply exceeded demand (the result would be depressed prices, much like we saw in the late 90s when oil was around $10 a barrel, or over 80% lower than today) the longer-term benefits could be fleeting. Historically when new, more expensive production comes online (usually as a result of high prices that make such new production profitable) oil gluts form and prices slide, wiping out high-cost producers (usually in the U.S.) and leaving low-cost Middle East and other emerging market producers with low cost structures intact, collecting market share while margins are painfully low. While this scenario may not play out this time around, there are other reasons to consider holding back on domestic production (like ANWR).

For national security, and just good economic sense, the U.S. should own the last of the oil — just in case we don’t come up with good alternatives in coming decades. If we think the 10 billion barrels up in the Arctic National Wildlife Reserve are worth drilling for now, imagine how strategic and valuable the oil will be when it’s the last 10 billion barrels left on earth? In other words, Iran will make less selling their next 20 billion barrels than we’ll make selling our 10 billion if we hang on to it for awhile.

Our goal should be to encourage countries like Iran to sell off their oil first, and at as low a price as possible. If they have the last oil, they’ll be calling the shots on whether or not they can build a nuclear power plant, in fact they’ll probably be able to just trade oil for nuclear weapons.

In the meantime, the major economies could try to slow the rate of growth in demand for oil so other countries oil production can catch up and drive prices — and Iran’s oil profits — down. If nuclear power is such a good idea for Iran, why not in the U.S.? It’s time to consider more nuclear power domestically rather then relying on military solutions to keep the Middle East gas station open 24/7.

This could mean a mix of taxes on oil at the barrel and on energy inefficient automobiles, and subsidies for public transportation are in order. California, thanks to Governor Schwarzenegger, just moved forward with their “Million Solar Roofs Initiative,” taxing utility bills to subsidize $3 billion worth of economically unfeasible solar panes on residential roofs.

Normally, government involvement in markets leads to massive waste and uneconomic use or resources. There is a very fine line between the sort of state policies that sunk Russia and Cuba and what California just pulled. High energy taxes and artificial subsidies to expensive alternative energy sources don’t make good economic sense, particularly in the short term, before economies of scale and technological innovation kick in as spending goes up. However, a free market won’t guarantee that countries like Iran won’t be raking in gobs of cash simply because their recently drawn borders turned out to encircle underground seas of oil.

This economy is really just fighting fire with fire. OPEC — the group of top oil exporting countries like Iran and Saudi Arabia — often agree to cut production (supply) to send oil prices higher. Imagine if the top world importers of oil created a cartel — OPIC — the Organization of Petroleum Importing Countries. We could all have meetings and take steps to curb demand to send prices lower to thwart OPEC.

It’s possible that Arnold Schwarzenegger, by reducing the consumption of energy produced by fossil fuels, just did more to fight future terrorism and Mideast conflict than the department of Homeland Security.

Jonas Max Ferris is a regular contributor on "Cashin' In" (Saturdays at 11:30am ET and Mondays at 5:30am ET) and is co-founder of MAXfunds.com .