Options for Iran oil sanctions face economic risks

[November 10, 2011]  DUBAI, United Arab Emirates (AP) -- With Iran angrily defiant about a U.N. report accusing it of developing nuclear weapons, Western powers and allies faced complicated questions Wednesday on how to further tighten pressure on the oil giant without shaking the fragile world economy.

The path toward possible new sanctions also quickly confronted a huge roadblock as Iranian ally Russia said it would oppose any new measures in the U.N. Security Council and rejected any military options as risking "grave consequences" to global security.

The sharp push back reflects the increasing difficulties for Western leaders to find ways to rattle Iran. So far, four rounds of U.N. sanctions have apparently failed to stop secret nuclear tests that brought Iran to the brink of mastering the process for atomic weapons, according to a U.N. watchdog agency report released Tuesday.

Iran claims the evidence in the report is baseless and says its nuclear program is only for energy and research.

The two opposing narratives where on vivid display Wednesday.

In a speech broadcast live on Iranian TV, President Mahmoud Ahmadinejad vowed that Iran won't retreat "one iota" from its nuclear ambitions, which include the process to enrich uranium.

About the same time in Paris, French Foreign Minister Alain Juppe said the world cannot accept a nuclear-armed Iran and pledged that France would support boosting sanctions to an "unprecedented scale" if Iran stonewalls investigations. Israel, meanwhile, called on the world to stop Iran's nuclear program, but did not repeat its warnings of a military option.

"There is lots of talk about how to slap new punishments on Iran," said Patrick Clawson, deputy director of the Washington Institute for Near East Policy. "Where it would hurt is oil. That, however, is a tough call with the world economy teetering."

Iran's oil exports -- among the biggest in OPEC -- are undoubtedly the Islamic Republic's most vulnerable spot as its key revenue source, but also represent a possible no-go zone for new sanctions.

"You'd want to impose the last big sanction on Iran to cut the revenue once and for all, but there would be detrimental consequences" by driving up oil prices and rattling world financial markets already uneasy over Europe's debt crisis, said Jamie Webster, a senior analyst at the Washington-based consultants PFC Energy.

An indirect option is seeking U.S. and European bans on dealings with Iran's central bank, which handles the country's oil commerce around the world. But that, too, could drive up oil prices -- now approaching $100 per barrel -- by raising the costs of transactions in Iran's main markets in Europe and Asia, including Security Council member China, which depends on Iran for about 10 percent of its growing fuel needs.

"There seems to be no appetite from the Obama administration to do anything to drive oil prices higher," said Helima Croft, a geopolitical analyst with Barclays Capital. "An oil embargo seems absolutely off the table."

Oil prices jumped 25 percent from the middle of February to March, when a rebellion in Libya cut off that country's 1.5 million barrels of daily oil exports. Iran currently produces about 3.6 million barrels per day, or about 5 percent of the world's total output.

"Who else wants to do an embargo at this point?" Croft said. "Certainly not the big consuming countries. Do you think the Chinese want an embargo? Do you think the Indians want one, or the South Koreans? Absolutely not."

China also has booming commercial ties with Iran -- becoming Tehran's main trading partner two years ago -- and would likely oppose any tougher sanctions. Beijing officials did not publicly comment on the report by the International Atomic Energy Agency in a likely sign that it will wait for Washington and Moscow to signal their intentions.

Russia -- which built Iran's only major nuclear reactor -- left no doubt where it stood.

It first shut the door on any new U.N. sanctions. Then Deputy Foreign Minister Sergei Ryabkov sharply condemned talk of possible military action on Iran as "illegitimate."

"It may have unpredictable and grave consequences in this already troubled and extremely explosive region, including for global security," he told the Itar-Tass news agency.

"We hope that common sense will prevail. We hope for that very much, indeed."

In his first reaction to the report, Ahmadinejad strongly criticized the U.N. agency for siding with "absurd" accusations he claimed were fabricated by Washington.

"This nation won't retreat one iota from the path it is going," Ahmadinejad told thousands of people in Shahr-e-Kord in central Iran. "Why are you ruining the prestige of the (U.N. nuclear) agency for absurd U.S. claims?"

For Iran, nuclear progress is a point of major national pride, along with other technological gains such as firing a satellite into space in 2009 and development of missiles capable of striking Israel.

"The Iranian nation is wise. It won't build two bombs against 20,000 (nuclear) bombs you have," he said in comments apparently directed at the West and others. "But it builds something you can't respond to: Ethics, decency, monotheism and justice."

In Israel, Prime Minister Benjamin Netanyahu's office said the IAEA report confirmed long-standing claims by Israel and Western countries that Iran is developing nuclear bombs.

"The significance of the report is that the international community must bring about the cessation of Iran's pursuit of nuclear weapons, which endanger the peace of the world and of the Middle East," the statement said.

Until its statement late Wednesday, Israel had been largely silent over the report, wanting to portray the issue as a global concern, not a dispute between two enemies. Israel sees Iran as an existential threat, citing the nuclear program, Ahmadinejad's calls for Israel's destruction and Iran's support for Arab militant groups.

In an interview with Israel Radio on Tuesday, ahead of the report's release, Defense Minister Ehud Barak said that without effective sanctions, Israel would not take any option "off the table," a reference to possible military action.

The 13-page annex to the IAEA's report released Tuesday included claims that while some of Iran's activities have civilian as well as military applications, others are "specific to nuclear weapons."

Among these were indications that Iran has conducted high explosives testing and detonator development to set off a nuclear charge, as well as computer modeling of a core of a nuclear warhead. The report also cited preparatory work for a nuclear weapons test, and development of a nuclear payload for Iran's Shahab 3 intermediate-range missile -- a weapon that can reach Israel.

The U.S. and allies claim a nuclear-armed Iran could touch off a nuclear arms race among rival states, including Saudi Arabia, and directly threaten Israel.

The bulk of the information in the IAEA report was a compilation of alleged findings that have already been partially revealed by the agency. But some of the information was new -- including evidence of a large metal chamber at a military site for nuclear-related explosives testing. Iran has dismissed that, saying they were merely metal toilet stalls.

There are no immediate signals on whether Washington and its allies would attempt to win over Russia and China for possible U.N. Security Council sanctions, or press ahead with their own measures. A key swing factor is whether the IAEA board decides later this month to refer the report to the Security Council.

That would at least force U.N. debate, but it's widely expected that the Russians and Chinese would reject any sanctions on Iran's oil and gas sectors or central bank.

"The fact is, the world needs Iranian oil and Iran needs to sell its oil," said Webster, the analyst. "We are locked in a stalemate."

[Associated Press; By BRIAN MURPHY]

Associated Press writers Ali Akbar Dareini in Tehran, Barbara Surk in Dubai, Angela Charlton in Paris, Lynn Berry in Moscow, Josef Federman in Jerusalem, Chris Kahn in New York and Charles Hutzler in Beijing contributed to this report.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.