By Scott B. MacDonald and Andrew Novo

NEW YORK (KWR) March 6, 2006 -- In 2005 Goldman Sachs published a report with the eye-popping headline that oil was going over $100 a barrel. Although oil reached $70 a barrel in 2005, it retreated to more manageable numbers, leaving the energy-hungry industrial world breathing a sigh of relief and American consumers once again content to indulge in the joys of large SUVs. However, that sense of relief may prove fleeting if political events in the Middle East, in particular in Iran, push oil prices back up to ever higher levels. The specter of nuclear war between Iran and Israel or a preemptive U.S.-led air strike against Iranian nuclear facilities, is haunting the Middle East. The volatile mix of high-stakes diplomatic gamesmanship and an energy-hungry world could open the door to a new oil shock.

At the core of the next Middle East crisis is Iran’s move to become a nuclear power. Although Iran has stated its program is for peaceful purposes, there is massive doubt in international circles. In all likelihood, Iran will become a nuclear power, much along the lines of Pakistan, India and North Korea. It will acquire the technology to produce nuclear weapons clandestinely, present an astonished world with a fait accompli, and use those weapons to leverage its global economic and political position.

As the contrast between the decisive action in Iraq and concurrent tip-toeing with North Korea demonstrates, nuclear weapons create a radically different playing field. It is very difficult to see the current leadership in Teheran willing to create a nuclear program only for peaceful purposes, especially considering what nuclear weapons have come to symbolize – a very important lever in international power politics. Add to this the aggressive tone coming out of Teheran – the country’s new president, Mahmoud Ahmedinajad, has publicly called for Israel to be “wiped off the map” – and you have the makings of a serious international crisis. Moreover, it is a crisis that holds few realistic options and responses, ranging from suboptimal to catastrophic.

From Iran’s viewpoint it has the right to nuclear power. The country has a long history of being a major power, having fought over much of the Middle East’s real estate at one time or another with Egyptians, Greeks, Romans, Byzantines, Mongols and Turks to name but a few. Along these lines, its past experience as a great power has not been lost on the revolutionary regime established in 1979. As Dilip Hiro noted in The Iranian Labyrinth: “Iran under the ayatollahs wanted to be the regional superpower, a position it thought it deserved: it was the most strategic country in the area, its shoreline covered not only the Persian Gulf but also the Arabian Sea, its population was one-and-a-half times the total of the remaining Gulf states, and it shared the same religion – Islam – with its neighbors”.

Iran’s effort to become the regional hegemon has brought it into a collision course with the United States on more than one occasion, especially as Washington’s regional policy has been to make sure no single state dominates the Middle East, both to secure oil supplies and to help guarantee the survival of its local ally, Israel. This situation has left Iran and the United States at odds. Add into this mix the U.S. involvement in the coup that ousted Prime Minister Muhammad Mussadiq in 1953, the Iranian hostage crisis of 1979, American support for Iraq during the Iran-Iraq War, and the U.S. effort to create a democratic Iraq, and one sees that the background for smooth relations between Teheran and Washington is simply not there. Now add the nuclear element. In many ways, Iran’s nuclear gambit is to give the Middle Eastern country the power to defy the United States as well as obliterate America’s closest regional ally, Israel.

Rhetoric from Iran’s leaders suggest that the potential target for the country’s yet-to-be nuclear weapons program is Israel. In response to Ahmedinajad’s actions, Israel’s Acting Prime Minister Ehud Olmet stated in January: “Under no circumstances, and at no point, can Israel allow anyone with these kinds of malicious designs against us (to) have control of weapons of destruction that can threaten our existence.”

Although diplomacy is still a preferred option, Israel’s political leadership has no problem with hinting about using force, something that it exercised in a successful 1981 raid on Iraq’s nuclear facilities. A repeat of such a strike against Iran cannot be ruled out, but while the Osirak raid was successfully completed in one day using sixteen planes to knock out a single Iraqi reactor, a strike on Iran would be more complicated. Iran has at least a dozen nuclear sites throughout the country, much of its work takes place deep underground, and its air-defense network is intricate and technologically advanced. It would probably take hundreds of sorties from hundreds of bombers to similarly cripple Iran’s military capabilities.

Israel’s best deterrent against Iran is probably not the prospect of air-strikes against nuclear facilities, but Israel’s own nuclear weapons. With probably 200 nuclear devices (the official number cannot be determined, because officially Israel denies that it has such weapons), Israel has a sufficient deterrent. But Israel is not Iran’s only potential target. With some significant American deployment in Iraq likely to continue for years, if not decades, those soldiers could become nuclear hostages to Teheran along with other significant American deployments in the region on land and at sea.

In early January Iran indicated that it has resumed work on its nuclear program by removing the seals from the Natanz enrichment plant. The response from the European Union, Russia, China and the U.S. was to take the matter to the IAEA, the nuclear “watchdog” for the United Nations.

The Security Council, in turn, postponed taking up the issue formally until after a March 6 meeting of the IAEA, thus allowing a Russian initiative time. Russia earlier made an offer, backed by China, to process uranium on its soil, an alternative to allowing Iran access to fuel for peaceful energy generation, but not access to weapons grade uranium. Although Iran initially rejected Moscow’s idea, it reconsidered and is now willing to talk.

Still the matter will eventually go back to the IAEA and Security Council. If the IAEA views Iran’s nuclear program as a weapons proliferation threat, economic and/or political sanctions could be used against Teheran. In turn, Iran could stop exporting oil. Use of oil certainly would hit at the West’s (and China’s and Japan’s) more vulnerable point – energy.

We expect that the U.S., Europe and Russia will continue to pressure Iran from further developing its nuclear program. We also expect that Iran, having learned from North Korea, will push ahead in going nuclear. Although Iran’s leadership is keenly aware of U.S. military forces next door in Iraq and Afghanistan, it also believes that Washington does not have the support at home to entertain another military venture. And any military venture in Iran would probably be bloody. All the same, Iran is facing growing international opposition to its nuclear game.

If Teheran goes ahead, there will be a cost – possibly militarily, but also economically. For all the likelihood of Teheran continuing to develop nuclear weapons, the risk of negative outcomes sits high on the worry list. As Rosemary Hollis, director of research at London-based Chatham House noted of Iran’s leadership: “All of their behavior indicates they’d like to have the option of a nuclear weapon, but I don’t think they have arrived at a conclusion as to what price they are prepared to pay.”

In addition, Iran’s polity is hardly monolithic. While Ahmedinajad has placed his second generation Revolutionary Guard clique into many positions of power throughout Iran, he is no friend to the country’s political left wing (reformers and soft-line Islamists), as well as the conservatives around former President Hashemi Rafsanjani. While Ahmedinajad and his clique see the Islamic Republic as an irresistible force of Shiite nationalism (with Persian overtones), many other members of the Iranian political system find the current policy direction as very worrisome. Ahmedinajad is willing to pay a very high price, but not everyone is ready to plunge the country into a conflict with the United States or Israel.

From the American perspective, Iran is a far bigger and tougher nut to crack than either Afghanistan or Iraq. Striking Iran would be a major test for already stretched American military forces. Iran has more money and a more sophisticated military than Saddam Hussein or the Taliban. As a major oil and natural gas supplier, Iran has built up a $40 billion war chest to tide it over if it suspends exports. In addition, Iranian support for Hezbollah in Lebanon and Hamas in the Palestinian territories makes it a regional player far different from isolated regimes such as those in Iraq (under Saddam), Afghanistan, and North Korea. This power gives Iran options to strike at the United States and U.S. allies, particularly Israel, through these organizations.

Another aspect of Iran’s game to achieve nuclear status is the network of alliances Teheran has extended into the rest of the world. Although Venezuela’s Hugo Chavez is a lightweight, Iran has developed good relations based on the export of oil to China and Pakistan and India.

This is not to argue that this in itself would bring these countries into Iran’s camp, but in a world increasingly dominated by natural resources politics, Iran holds a number of cards. China, in particular, has the need for allies in part to counter what it regards as too much U.S. power. India also good reasons for avoiding an outright confrontation with Iran, though it is less comfortable with Teheran’s strident brand of Islam.

The Iranian crisis is to be one of fits and starts, with Teheran taking a few steps forward, a few steps backward, but relentlessly moving toward its goal of making itself a nuclear power. And the closer Iran gets to this goal, the greater the tensions will be in the Middle East – and the potential for higher oil prices. Resolution of this crisis will take a long time, will probably be peaceful (with Iran in control of nuclear weapons), and will rearrange the structure of power in the Middle East. The other option is stark – a new Middle Eastern war against Iran. Either way, the interrelationship between unpredictable geo-political facts and oil prices is not going away anytime soon.