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U.S.-Iran Foreign Policy: Global Energy Independence From Iran is Not the Solution

U.S.-Iran Foreign Policy: Global Energy Independence From Iran is Not the Solution. By Adnan Bohri April 25, 2007. Agenda. Background Iranian Revolution, why sanctions exist The Iran-Libya Sanctions Act of 1996 Do sanctions apply to the IPI pipeline?

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U.S.-Iran Foreign Policy: Global Energy Independence From Iran is Not the Solution

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  1. U.S.-Iran Foreign Policy: Global Energy Independence From Iran is Not the Solution By Adnan Bohri April 25, 2007

  2. Agenda • Background • Iranian Revolution, why sanctions exist • The Iran-Libya Sanctions Act of 1996 • Do sanctions apply to the IPI pipeline? • Why sanctions and energy independence from Iran are not the solution.

  3. Background and Fun Facts • Capital: Tehran • Population: 70,049,262 • GDP: $610.4 billion • Language: Persian (Farsi) Source: http://encarta.msn.com/encyclopedia_761567300/Iran.html

  4. Iran Pre-1979 • Ruled by the Shah, Mohammad Raza Pahlavi • Allies with U.S. during the Cold War • Regime fell in the Iranian revolution of 1979 Source: http://encarta.msn.com/encyclopedia_761567300/Iran.html

  5. Iranian Revolution • After the overthrow of the Shah, Aytollah Ruhollah Khomeini came to power • Known as the Supreme Leader of Iran • Established Islamic Republic of Iran Source: http://encarta.msn.com/encyclopedia_761567300/Iran.html

  6. Iran Hostage Crisis • U.S. Embassy in Tehran seized on 11/4/1979 • 63 American citizens taken hostage • 50 hostages held prisoner for 444 days • Supported by Khomeini under the slogan “America can’t do a damn thing” Source: http://encarta.msn.com/encyclopedia_761567300/Iran.html

  7. Overview of sanctions against Iran • Began after 1979 Iran Hostage Crisis • Iranian Transactions Regulations - 31 C.F.R. § 560 • Import embargo on Iranian-origin goods and services • No direct trade with the U.S. since 1995, when the U.S. government banned all commercial and financial transactions between U.S. companies and Iranian public and private entities • Iran-Libya Sanctions Act of 1996 • Current Nuclear Standoff with Iran • Could lead to additional sanctions by U.N. • Source: http://www.treas.gov/offices/enforcement/ofac/programs/iran/iran.pdf

  8. How Much Energy Does Iran Have? • Possesses world’s 2nd largest natural gas reserves • ~10% of world’s known oil reserves (4th largest) • 2nd largest oil producer in OPEC Source: http://www.eia.doe.gov/emeu/cabs/Iran/Background.html

  9. Iran-Libya Sanctions Act of 1996 (ILSA) • Allows the President to impose sanctions if a person has made an investment of more than $20 million “that directly and significantly contributes to the enhancement of Iran’s ability to develop petroleum resources of Iran.” • Controversial because it allows the President to impose unilateral sanctions on foreign companies or entities Source: Iran-Libya Sanctions Act, 50 U.S.C. § 1701 note (1996)

  10. ILSA Continued • “Investment" defined as the entry into a contract that includes responsibility for the development of petroleum resources in Iran or Libya • Statute silent as to whether the construction of energy transit routes from Iran might be considered an investment • However, Clinton Administration position was that, under certain conditions, the construction of such routes could be a sanctionable investment Source: Kenneth Katzman, The Iran-Libya Sanctions Act (ILSA), Congressional Research Service Report for Congress, updated Apr. 26, 2006.

  11. ILSA’s First Test • The French oil company, Total SA, struck a $2 billion deal with Iran in September 1997, to develop natural gas reserves in Iran’s South Pars field • This was the largest single foreign investment in Iran since the U.S. Embassy in Tehran was sacked in 1979 • Clinton Adm. found that deal violated ILSA, but ultimately decided to waive sanctions Source: Kenneth Katzman, The Iran-Libya Sanctions Act (ILSA), Congressional Research Service Report for Congress, updated Apr. 26, 2006.

  12. The Iran-Pakistan-India Natural Gas Pipeline • $4-7 billion project • ~2100 km in length from Iran to India • Would supply ~60 million cubic meters of gas a day to India and up to 30 million cubic meters a day to Pakistan. • Officials of India, Pakistan & Iran met in August 2006 to discuss pricing of gas • Tentatively scheduled to begin construction in 2007 and be completed by 2010 Source: George Perkovich and Revati Prasad, A Pipeline to Peace, N.Y. Times, Apr. 18, 2005.

  13. The Need for the Pipeline • Pakistan would benefit from Iranian natural gas exports, and Pakistani territory would be used as a transit route to export natural gas to India • Would bring in ~$700 million per year in transport fees • India’s Energy needs will surpass China’s in the next 50 years • Cooperation between Pakistan and India would increase stability in South Asia Source: George Perkovich and Revati Prasad, A Pipeline to Peace, N.Y. Times, Apr. 18, 2005.

  14. Would the Pipeline be an “investment” under ILSA? • The Iranian side of the project will be financed entirely by Iran and a group of multi-national investors Iran will be required to put together • Pakistan's investment in the project will start only after the pipeline reaches Pakistani territory • Applying a plain-meaning interpretation of ILSA, Pakistan’s and India’s involvement could be interpreted as one that does not directly contribute “to the enhancement of Iran’s ability to develop petroleum resources of Iran.”

  15. Comparing Total’s case with Pakistan’s • $2 billion investment • Direct development of oil fields within Iran • $7-10 billion proposed project • Natural gas transit route • No direct development by Pakistan • Pakistani ownership of the pipeline would begin at its border • However, deal would provide incentive and funding for Iran to develop its gas resources

  16. Recent Developments • ILSA expired on August 5, 2006 • Iran Freedom and Support Act • Bill passed by Congress that tightens the sanctions imposed on entities that invest in Iran’s energy sector • Includes stricter provisions regarding the waiving of sanctions by the president

  17. Congress’s View • Agreement in Congress that ILSA shouldn’t be allowed to expire • U.S. must continue to look at economic sanctions as a method for keeping Iran in check and isolating them Source: Hearing of the Senate Banking, Housing, Urban Affairs Committee on June 22, 2006

  18. Bush Administration’s View • The Bush Adm. sees the value of ILSA, but did not support significant changes to the statute • Did not support the tightening of the ILSA sanctions as contained in the Iran Freedom Support Act • Restrictions would weaken the President’s flexibility to pursue diplomacy with Allies • Source: R. Nicholas Burns, Under Secretary of State for Political Affairs, Testimony Before the Senate Committee on Banking, Housing and Urban Affairs, June 22, 2006 and March 21, 2007.

  19. Have Sanctions Been Effective and should they continue to be used? • 27 years of sanctions and isolation have not dissuaded Iran from pursuing its nuclear program or driven the cleric-led government from power. •  instead have convinced Iran that only nuclear technology can protect them from American hostility • Source: R. Nicholas Burns, Under Secretary of State for Political Affairs, Testimony Before the Senate Committee on Banking, Housing and Urban Affairs, June 22, 2006 and March 21, 2007.

  20. Effects of Sanctions Continued • Since the Total waiver, ~ $11.5b in foreign investments in Iran’s energy sector have been agreed upon. • Iran’s natural gas sector, non-existent prior to the late 1990’s, is becoming an increasingly important factor in Iran’s energy future as a result of foreign investment. • E.U. threatened formal counter-action over ILSA in the WTO, and in April 1997, the U.S. and E.U. formally agreed to try to avoid a trade confrontation. Source: Kenneth Katzman, The Iran-Libya Sanctions Act (ILSA), Congressional Research Service Report for Congress, updated Apr. 26, 2006.

  21. Why Iranian Sanctions are Detrimental for American Interests • Sanctions on Iran higher global energy prices  higher U.S. energy prices • Energy prices are set by the global market, so doesn’t matter whether it’s coming from Texas or Tehran • Increases in oil prices correspond closely to downturns in the economy. The last four recessions all correlated with restrictions in the oil supply. • When energy prices spike, the market slows down; when prices decrease, the market speeds up. • Lower oil and gas prices allow us to invest in alternative energies and gives us time and breathing room to develop those technologies. Source: Mark Zupan, Dean of Graduate School of Business Administration at the University of Rochester, New York. Available at http://analysisonline.org/energy/zupan.html

  22. Continued... • Numerous Western oil companies have shied from investing in Iran for fear of incurring America’s wrath • Imposing sanctions on companies that develop Iran’s petroleum resources would isolate America from its European allies, as well as China and India • Best way to engage Iran is to bring them into the global community • Lifting economic sanctions, or at the very least allowing American allies to invest, should be seen as real priority.

  23. Conclusions • U.S. made historic offer in June 06 when Sec. Rice first offered to engage in direct discussions with Iran provided Iran completely, verifiably suspends its enrichment activities. • Instead of energy independence, the goal should be an effort to improve relations with Iran’s regime and bring them into the global community. • U.S. unilateral sanctions on Iran undermine this goal.

  24. The End

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