Oil and Nukes

Iran was in the news frequently this past week, first for its rejection of the latest UN resolution relating to its nuclear program, and later in a report issued by the National Academy of Sciences, indicating that Iran's oil exports could decline precipitously within a decade. For those looking to connect dots, these two seem quite tempting. However, while the idea that Iran might need nuclear power because its hydrocarbons are running out has the advantage of simplicity, this interpretation strikes me as too superficial. It also ignores the reality that electricity and petroleum fill distinctly different market segments, and are not easily substitutable for each other, given today's technology. If there is a connection, it is a less obvious one.

With Iran continuing to enrich Uranium in spite of IAEA and Security Council admonitions, the UN last week ratcheted up the pressure with another Security Council resolution, this one involving mild sanctions. It remains to be seen whether they are tough enough to cause real pain for President Ahmadinejad and the ruling mullahs, or will serve merely to annoy them. President Ahmadinejad's response, suggesting Iran will increase the pace of its nuclear activities, included what must surely be the first reference to the Muppets in the history of diplomacy. Unless this was a playful mistranslation, it reveals how the regime regards the countries that joined the UK and US in voting for the resolution.

The NAS study on Iran's future oil export potential will not surprise those who have been watching economic trends in Iran, and the degree to which US sanctions and Iran's own policies have impeded large new oil projects. I'm not sure how much light it sheds on the country's motives for developing nuclear power. As I discussed in an article written for Geopolitics of Energy in 2005, nuclear power could indeed displace domestic hydrocarbon consumption and free up additional volumes for export, but the hydrocarbons displaced would be principally natural gas, not oil. Furthermore, nuclear power costs more than the value of the gas it would free up, particularly when many trillions of cubic feet of Iran's gas remain undeveloped. Building a self-sufficient nuclear fuel capability, rather than buying fuel rods on the open market, further inflates the cost of incremental gas exports beyond any realistic LNG market price.

Despite the lack of a plausible direct connection between oil exports and nuclear power, these two issues may still be related. The prospect of losing its status as a top oil exporter must be very troubling to Iran's leaders. Iran's 2.6 million barrels per day of exports currently account for about 7% of global exports. With oil prices over $60/barrel and absent enough global spare capacity to replace their contribution, Iran holds a trump card in any negotiations or confrontation with the US and EU. If the NAS report is correct, that advantage will erode steadily over the next decade. Facing the prospect of losing their oil weapon, it's not hard to fathom that Iran--which sees itself as the rising power in the region--would want another, even more powerful deterrent. Thus the connection between this month's dots could well be the substitution of a new strategic weapon for a fading one, rather than one form of energy for another.