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Could A Gasoline Embargo Bend Tehran? Could A Gasoline Embargo Bend Tehran?

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Could A Gasoline Embargo Bend Tehran?

New Bills Target Iran's Gas Imports, But Experts Warn They Will Be Tough To Enforce -- And Could Backfire

With Iran still refusing to play ball with the West over its nuclear program, lawmakers are turning up the heat by targeting oil companies that import gasoline to Iran. But critics of new House and Senate legislation cite a laundry list of reasons why targeting gas imports won't work -- and why it could even strengthen Mahmoud Ahmadinejad's government.


Despite being the fourth-largest exporter of crude oil in the world, Iran's limited refining capacity forces it to import 40 percent of its gasoline. The government also subsidizes the price of gasoline, driving demand even amidst an economic downturn and making the country's reliance on foreign imports even more costly.

A new bill -- the Iran Refined Petroleum Sanctions Act, which passed the House Foreign Affairs committee Wednesday -- looks to exploit that weakness. It would bolster the Iran Sanctions Act of 1996 and prohibit companies that import gasoline to Iran from contracting with the U.S. government. Similar sanctions are part of a larger Iran bill approved unanimously Thursday by the Senate Banking Committee.

Rep. Howard Berman, D-Calif., who chairs the House Committee on Foreign Affairs and sponsored the House bill, defended the timing of the legislation against protests from some lawmakers that the president be given more time to work out a diplomatic solution. Tehran last week rejected a deal with the International Atomic Energy Agency that would have sent its uranium stockpile to Russia to enrich for medical purposes.


The bill, Berman said at a markup hearing Wednesday, "will take the first key step to ensure that President Obama is empowered with the full range of tools he needs to address the looming nuclear threat from Iran, even as he pursues diplomacy and, if necessary, the multilateral sanctions track. Given the length of time it ordinarily takes the House and Senate to move a significant piece of legislation to the president's desk, it is important that we initiate this process today."

But critics warn that, timing aside, the proposed sanctions could easily backfire.

For starters, it's unclear whether the legislation will be enough to dissuade Iran's main suppliers -- Royal Dutch Shell, France's Total, China's state-run Zhuhai Zhenrong Corp. and Russia's Lukoil, among others -- from continuing to import gasoline. Tehran has said it will cut off any company that complies with U.S. sanctions, a threat that will keep some companies in line.

And even if some gasoline exports to Iran can be curtailed, Russia and Venezuela have the excess refining capacity to plug the gap, according to Fariborz Ghadar, a trade expert at the Center for Strategic and International Studies. Hugo Chavez is already bringing Venezuela's considerable refining capabilities to bear: In September, Caracas pledged to supply Iran with 20,000 barrels of gasoline a day.


And what will happen if the sanctions are successful and oil majors stop selling Iran gasoline? The result might be the worst scenario of all, Ghadar argued. Iranians currently get 100 liters of discounted petrol every month, but at great expense to the government. The ruling government has been looking for ways to shrink the subsidy program, and the U.S. sanctions would give them cover to do so. That would hurt everyday Iranians, cast Washington (once again) as a villain and perhaps rally citizens around Ahmadinejad, who is still politically weak after post-election rioting this summer.

The idea that more expensive gas will spur average Iranians to confront the government is misguided, Ghadar argued.

"The problems in June, July after the election had nothing to do about them not being able to buy an HP printer or gasoline," he said. "It was about not being able to speak, basically seeing that the system is not a meritocracy."

Rep. Ron Paul, R-Texas, echoed those worries at the hearing Wednesday.

"The theory is, if we really punish the people, take their gasoline from them, then they're going to get angry," he said. "And they will. They're going to get angry at us. They're not going to get angry at the Ayatollah. What you're doing is deliberately undermining the dissidents there."

Berman acknowledged that the legislation would likely have "a significant impact on the Iranian economy, including quite possibly on average Iranians."

"While that is a distasteful prospect, the urgency of dealing with the Iranian nuclear project -- and the immense danger that a nuclear-armed Iran would pose to tens, if not hundreds, of millions of people who will fall within the range of its missiles -- compels us to go forward with this legislation," he argued.

The Revolutionary Guard Corps, which was central in putting down the summer protests, might benefit from the bill as well. For one, they are well-situated to take advantage of sanctions: The corps smuggled oil during the 1990s when Iraq was under embargo, and it continues be involved in the underground economy, said Alireza Nader, an Iran expert with the RAND Corporation. "Any sort of sanctions regime targeting fuel imports is going to be difficult to enforce because there is the black market, which the Revolutionary Guard is very much involved in," he said.

More fundamentally, Washington has struggled to sanction energy-rich Iran in part because oil-hungry countries are tough to corral into a unified front. American sanctions against Sudan have been similarly ineffective, as Chinese state-owned oil companies have been all too eager to fill the void.

Targeting gasoline imports is just one facet of the U.S. assault on the Iranian economy. The Treasury Department has spent the last three years blacklisting Iranian banks and encouraging international banks to avoid doing business with Iran. Ghadar argued that banking sanctions have worked well and should continue, since they hurt Iranian elites more than "Average Joes."

The Treasury Department has also put Iran's national maritime carrier in its cross hairs, citing the company's "denial and deception" regarding its shipments of arms. And the House last month passed the Iran Sanctions Enabling Act, which would allow state and local governments to divest from companies doing business in Iran's energy sector, by a 414-6 vote.

The Senate Banking Bill passed Thursday incorporates a number of the above options, tightening sanctions on financial transactions, targeting companies that export gasoline to Iran and authorizing state and local governments to divest.

Sanctions on investment and technology transfer have been effective at crippling investment in Iran's natural gas industry, according to Greg Priddy, an energy analyst with the Eurasia Group. But keeping Iranian gas offline has meant that the Nabucco pipeline, which would connect Iran to Europe, may remain a pipe-dream -- and make our Eastern European allies more vulnerable to Russia's whims.

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