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Can Iran Beat Gasoline Sanctions?

Can Iran beat gasoline sanctions?  The answer seems to be yes.

On the front page of the Financial Times on 23 September 2009 (Javier Blas and Carola Hoyos, “Chinese Begin Petrol Supplies to Iran”):

Chinese state companies this month began supplying petrol to Iran and now provide up to one-third of its imports in a development that threatens to undermine US-led efforts to shut off the supply of fuel on which its economy depends.

Moreover, Iran apparently has been making progress in becoming less dependent on gasoline import, according to Gal Luft, executive director of the Institute for the Analysis of Global Security and publisher of the Journal of Energy Security (“The New Iran Sanctions: Worse Than the Old Ones,” Foreign Policy, 11 August 2009):

The little-known reason is that President Mahmoud Ahmadinejad has imposed dramatic measures to eliminate this strategic vulnerability.  He has massively expanded the country’s refinery infrastructure.  Seven of Iran’s nine existing refineries are undergoing expansion projects; seven new refineries are on the drawing board or already under construction.  In three to five years, these projects will double Iran’s refining capacity, putting it on par with Saudi Arabia.

These efforts, in addition to an effective petrol rationing scheme, have slashed Iran’s need to import petroleum products.  As of this fall, Iran’s daily gasoline dependence will stand below 25 percent.  This figure is expected to decline even further to roughly 15 percent over the next year as new refining capacity comes online.  By 2012 Iran is projected to be gasoline self-sufficient; shortly after that, the Islamic Republic is likely to become a net gasoline exporter.

In expanding its refining capacity, Iran worked with French, British, German, Swiss, Korean, Romanian, Italian, Danish, Japanese, Chinese, and even American firms (working through shell companies set up overseas).  Vigorous enforcement of the Iran Refined Petroleum Sanctions Act might cause some of these companies to reconsider their relations with Iran.  But the idea that the new U.S. sanctions on gasoline imports — widely thought in Washington to be a “drastic” measure — would derail Iran’s progress toward energy independence or inflict more than a pin prick on the mullahs’ regime is overly optimistic.

First, the foreign companies that have been involved in Iran’s refinery expansion projects have done so in the early phases of licensing, consulting, financing, design and engineering.  For the most part these services have already been performed; the Iranians do the construction themselves.  Even if the foreign partners responded to the sanctions, it would have little impact on the projects.

Second, Iran is becoming increasingly reliant on China for its refinery expansion program — and Beijing has shown little interest in abiding by any sanctions regime initiated by the United States.  In recent months, Chinese companies have greatly expanded their presence in Iran’s oil sector.  In the coming months, Sinopec, the state-owned Chinese oil company, is scheduled to complete the expansion of the Tabriz and Shazand refineries — adding 3.3 million gallons of gasoline per day.  Iran has also secured agreements to take part in three overseas refining joint ventures, in Malaysia, Indonesia, and Syria.  The chances those governments would annul these projects are nil.

Simultaneously, Iran is ambitiously pushing alternative fuels to reduce its gasoline consumption.  Three years ago, Ahmadinejad initiated a program to convert Iran’s vehicles to run on natural gas rather than gasoline.  Iran has the world’s third-largest natural gas reserves (around 16 percent of the world’s total).  Now, the government is subsidizing retrofitting cars for natural gas; an Iranian version of “cash for clunkers” is phasing out old gas guzzlers; and domestic automakers now must enable all new cars to run on natural gas, which hundreds of refueling stations are being renovated to serve.  The government also provides financial incentives for drivers to prefer natural gas over gasoline.  A gallon of gasoline costs 53 cents while the natural gas equivalent only costs 15 cents.  Since the initiation of the program, gas has replaced 10 percent of Iran’s total gasoline consumption for transport fuel.

Furthermore, Iran is one of the world’s largest producers of methanol — a cousin to ethanol that can be made from not just agricultural products, but also coal and natural gas.  The country has four major methanol plants and is building two massive new ones, among the largest in the world, which will increase Iran’s production capacity by more than 60 percent.  These factories, built with the aid of a Danish company, will enable Iran to blend alcohol into its fuel, just as the United States does with gas and ethanol, and lower its gasoline consumption by at least 5 percent without any need for vehicle retrofitting.  Finally, the Iranian government is encouraging its citizens to use public buses by subsidizing diesel.

All of these measures show that the chance a U.S. sanctions policy will inflict economic pain and trigger a change in the regime’s behavior is slim.

Will the Obama administration and Congress reconsider their idea of gasoline sanctions, in light of the above?

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