No Nukes?

Interesting topics for blogging abound this week, including the election results in Venezuela and Russia, both of which have implications for energy. But the most important news may be the release of the new National Intelligence Estimate (NIE) on Iran’s nuclear ambitions, concluding that the country’s active weapons program was put on hold in 2003. I have been following this issue for some time, partly because of its importance for the future stability of the oil-rich Middle East, but also because it is so inherently fascinating. The key questions about the NIE are how likely it is to be correct, this time, and how it could alter diplomatic efforts to constrain Iran. At least based on the reporting I’ve seen so far, this report changes nothing and everything, simultaneously.

First, consider the conclusions of the new NIE. It reflects a dramatic shift in the consensus of the US intelligence community away from the notion that Iran has an active nuclear weapons program extending beyond the uranium enrichment we’ve been observing for several years, to a posture that the New York Times refers to as “agnosticism” about Iran’s nuclear ambitions. To paraphrase the old hair-color ads: do they or don’t they; only their leaders know for sure. The similarities to the pre-war intelligence about Iraq are striking, particularly because it’s not clear how much of this is based on reliable intelligence assets on the ground in Iran, instead of analysis of data gathered by means of electronic and satellite reconnaissance.

I am in no position to doubt the findings of the NIE with regard to any specific programs within Iran. The fact that its findings appear to coincide with the conclusions of the International Atomic Energy Agency certainly lends it additional credibility. So let’s assume that the NIE is correct, and that all actual work on weapons, including design, fabrication, and enrichment to the concentrations necessary for a bomb, has ceased. That still leaves us with the enigma of a major oil and gas exporter spending so much money on an energy source that is clearly more expensive than developing its vast unexploited hydrocarbon reserves. I looked at this in some detail in 2005, and I haven’t encountered anything that changes my conclusion that the best explanation for Iran’s nuclear activities involves nuclear weapons somewhere down the road. Even if Iran’s visible uranium enrichment program is entirely peaceful, it still constitutes an option on a future bomb effort. If anything, the NIE’s conclusion makes it all the more remarkable that Iran would create this option at such a high diplomatic cost, without actually planning to build a bomb.

Whatever I may think about this finding, however, what really matters is how it is interpreted by the US Administration, the Congress, and especially by the international community, including the UN Security Council and the key three European participants in the diplomatic effort to contain Iran’s nuclear program, Britain, France and Germany. While the NIE report is hardly a clean bill of health for President Ahmadinejad and the ruling mullahs, it is bound to undermine support for maintaining the current level of sanctions and other pressure on Iran, let alone stiffening them. And here at home, by rendering the nuclear threat from Iran more remote, the report should strengthen the hand of politicians arguing for engaging Iran’s leaders, rather than confronting them.

The NIE should also lead to lower oil prices. As the consequences of this report play out, and as pressure on Iran begins to ease, the oil market risk premium based on the possibility of military conflict with Iran should begin to abate. It could also contribute to higher oil production capacity in the long run, by easing the restrictions on international investment flowing into Iran’s energy sector. That ought to be good for a few bucks off the current oil futures price, not just in the front months, but all the way out to 2012 and beyond.

What are left with, then? With or without an active nuclear weapons program, Iran remains generally hostile to US interests and is actively engaged in manipulating the outcome in Iraq to suit its own regional geopolitical aims. Even if it is not on a path to achieving nuclear weapons in the next few years, it is laying the groundwork for being able to do so some time in the future, as noted in the NIE. While this report ought to come as a relief to everyone, it’s less obvious that it justifies pushing the “reset” button on our entire Iran strategy. That’s what I expect most of the arguing to focus on, in the weeks ahead. In the meantime, this news ought to reinforce the other bearish factors in the oil market.