China and the limits to Iran’s oil weapon
With around 10% of OPEC’s net oil exports, Iran has a huge oil weapon, as we previously have discussed. Whether by itself, or with Admadinejad’s Islamist troublemakers in Nigeria and his mini-me Hugo Chavez, Iran could send the price of oil over $200 a barrel — or some price that would guarantee worldwide recession. We have discussed scenarios, including those of the US Army War College, in which Iran might use its oil weapon and how it might do so. But it is far from clear what would happen in the event Iran tried such a stunt.
One major downside for Iran of using its oil weapon in this fashion might be forcing China over to the side of the US, from its current role of humbug, arms supplier, oil customer, and friend to Iran. Here is the logic. Chinese authorities fear domestic instability above all else. China has said on numerous occasions that it needs to keep GDP growth of at least 7% a year to prevent labor unrest. China’s unbroken string of 20 years of 9% GDP growth so far has prevented this labor unrest from becoming an issue (though China has plenty of other unrest); the labor unrest could become a real threat to the regime in the kind of serious recession that would ensue from Iran’s dramatic use of its oil weapon.
Moreover, the existing problems of China, currently papered over and masked by the country’s growth, would become evident and severe in a recession. China’s economy, while currently outstanding, has a lot of vulnerabilities of the kind that caused “crashes” in the US during its previous periods of hyper-growth. The economy of China is small (except in PPP terms), and China depends on exports for 70% of its growth. A serious worldwide recession would curtail the West’s and the US’s purchases from China, which are crucial to China — for example, 5000 of Wal-Mart’s 6000 suppliers are Chinese, an incredible figure.
The effects of a major recession on China are hard to calculate with precision, but it is certain that they would be severe. China has cooked books, has had tremendous overinvestment in fixed assets, a banking system riddled with $400 billion to $1.2 trillion in bad loans, and 70 million landless peasants, to name just a few sources of potential instability. China could of course expend some of its nearly $1 trillion in foreign exchange reserves to lessen the economic impact of such a slowdown, but such measures are stopgaps, however sizeable, and do not address the underlying problems that would be revealed and intensified in a Chinese recession.
Of course it is never wise to underestimate the role of folly in human affairs, certainly not with Iran and the millennarian Ahmadinejad, so it cannot be assumed that Iran will act in its rational self-interest. But if Iran seeks to cripple Western economies at some point, it could face a somewhat more united opposition than currently exists.
August 23rd, 2006 at 10:14 am
Question: Iran’s economy appears to be in terrible shape and its rulers unpopular. How long could it survive a major decrease in oil revenues?
August 23rd, 2006 at 3:24 pm
In addition to China, what would the domestic effects be in Iran if oil went to $200.00 a barrel?
Don’t they import most of their refined product?
August 23rd, 2006 at 8:28 pm
Well, Iran can combine obstruction of oil supply from Saudi & Co through Hezbollah-type organisations, and at the same time sponsor China by purchasing a lot of military hardware from them. China is buying a lot from Russia, and technology transfer makes madatory part of all deals. In a couple of years they will be ready to supply billions worth of tanks, RPGs, planes. I am afraid Americans will have to solve this problem - not Israeli, not Chinese, Americans.
The truth is, there are plenty of means and reasons to solve it now.
August 24th, 2006 at 2:16 am
If China needs Iran’s oil so bad, and Iran won’t play ball, China might just go in, displace their population and take it, giving the world the finger if it criticizes them.
August 24th, 2006 at 5:37 am
Terry: But if major oil price rises devestate the Chinese economy, wouldn’t they–to say nothing of the EU and the Arab states–join with us against Iran to prevent major disruptions in the Saudi, Kuwait, gulf states et al, oil flow?l
August 24th, 2006 at 6:22 am
Terry,
I don’t think that negates the point of this article. I don’t see how China could manufacture enough weapons to keep their economy from tanking and causing the predicted unrest in the general populace. There just aren’t enough factories or jobs or buyers. Nor do I see Hugo Chavez or Nigeria surviving a self-inflicted depression.
I agree with you about Iran. Solve it now, not later. Because this one-sided war has been going on since the Tehran Embassy takeover.
August 25th, 2006 at 1:16 pm
Mark D
“I agree with you about Iran. Solve it now, not later. Because this one-sided war has been going on since the Tehran Embassy takeover.”
We had our op-portunity to set back radical Islam when it was a country (Iran ) that was committing acts of war against us (the hostages) How they must have laughed when wimpy Carter ’s expeditionary force ended up in the desert like our defense system -broken and ineffectual. Carter birthed this Islamist monster - a country (yes full of oil) defying us would have been a great place to start asserting western values and toughness- and a westernized people a hell of a lot closer to our views than Iraq.
History will record Carter as losing the West -Clinton with his Monica missles and pulling out of Somalia and taking many terroist acts without retaliation didn’t help either.