Ayatollah Ali Khamenei, Iran's supreme leader in a scathing attack on the United States said this Sunday that if the United States makes a wrong move energy flows in the region would be endangered. Presuming there is some semblance of sanity left in the Iranian regime this would signal Iran's threat to cease or diminish its oil exports to world markets. Interfering with energy flows by attacking the region's shipping lanes or production and oil-loading facilities would be a "causus belli." that would certainly result in the termination of the Iranian regime as currently constituted.
Khamenei spoke from a podium emblazoned with his predecessor Ayatollah Khomeini's words "America cannot do a damn thing" and then went to cite his perception of U.S. failures in Iraq, Afghanistan and Palestine. This from the spiritual and de facto head of a regime considered by our government as the No. 1 state sponsor of terrorism. Ironically, by fulfilling their threat, Iran's actions would give us an opportunity to do "a damn thing". And to do it without firing a shot, and using an asset already in place, the Strategic Petroleum Reserve.
Iran produces 3.85 million barrels of oil a day. Of this, approximately 2.5 million barrels are exported on the world market. The profits generated represents by far that nation's major income stream and revenue source toward funding its national budget. Without oil revenues Iran would most likely sink into economic chaos and it is doubtful that its government could survive even a year.
Exporting 2.5 million barrels a day comes to slightly over 900 million barrels a year. The International Energy Agency (IEA) reports that its members i.e. The U.S., Europe, Japan, Korea, etc. have some 4.1 billion barrels of strategic and commercial reserves on hand. The U.S. alone has 700 million barrels in its Strategic Petroleum Reserve (SPR) and over 300 million barrels in commercial reserves- as oil; not counting downstream inventories of gasoline, diesel, heating oil and on. Consider the impact were the United States and the I.E.A. to announce that any willful curtailment of oil shipments by Iran would immediately be met by an equal release in kind to the market from existing reserves.
Further, that these reserves would be made available to Iran's traditional customers whether or not they are members of the IEA. The oil being made available would be at market prices and equivalent in quantity to the Iranian cut off. Were such a substitution of supply be put into place, Iran's absence as supplier, even for a year or significantly longer, would only be marginally felt by the world marketplace. But it would certainly be felt by Iran and would in all likelihood result in the regime's demise. In addition, just broadcasting the intent to act accordingly would becalm the markets overnight.
Would the administration accede to such steps? Perhaps. But they would be subject to enormous pressure from the oil patch. A clear signal of willingness to use the SPR and to cooperate with the IEA would result in an abatement of panic and speculation in the markets. Less panic equates to lower oil prices as we have learned over the past years. Lower oil prices result in lower earnings to oil companies, big and small.
The oil patch would argue that the SPR is only to be used in extreme emergencies, as though Iran cutting off oil supplies is not exactly that. Further they would argue that interfering with the market price mechanism presents greater dangers than the geopolitical consequences of not taking action. Sadly the administration is so wedded to the to oil interests that they may well let Khamenei and company walk all over us until the need arises to put more of our armed forces on the front line to straighten things out. I hope I'm wrong.