Weakening Iran with cheap gasoline

A friend asked me what I thought of this ten-day-old article from Foreign Policy's Shadow Government blog. The author, John Hannah -- a former adviser to Dick Cheney -- thinks Saudi Arabia could (and should) manipulate oil prices to weaken Iran.

With daily exports in the range of 2.5 million barrels per day, Iran stands to lose about $900 million annually from every one dollar drop in the price of oil. With excess capacity of 4 million barrels per day, the Saudis are clearly in position to go much farther than they have to date in squeezing Iran if they so choose. An aggressive Saudi effort to depress oil prices well below the current $75 target could prove extremely harmful to Iran's already reeling economy and tumultuous political situation.

Let's stipulate, from the start, that Hannah's idea would surely hurt many Iranian civilians. The Iranian government is already planning to phase out food and fuel subsidies in response to an existing budget crunch. If revenues fall even further, the government will have to take even more austere measures -- and those will mostly impact Iran's poor and middle classes. (I really doubt the regime will furlough the Revolutionary Guard to save money.)

Hannah's argument also assumes there is a direct, and logical, relationship between supply and demand; that isn't always the case in the oil industry. The U.S. apparently has large stockpiles of crude oil right now, but prices climbed this morning anyway, largely because of a weak dollar and the Iranian war games which started this week. (Oil did finish the day flat, though.)

Saudi Arabia could probably flood the market with crude, yes, but doing so would surely spark a response from Iran -- and the resulting unrest would have an unpredictable effect on oil prices.

Finally, I think Hannah is leaving out a few other important actors -- namely, the rest of OPEC. Artificially low oil prices wouldn't just hurt Iran. They would hurt Iraq, which is struggling to increase its oil production and rebuild a shattered economy; the Gulf countries, some of which are staggering under massive loads of debt; and other oil-producing nations around the world. I'm not sure they would all agree to allow Saudi Arabia to dump another 4 million barrels per day onto world markets.

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