From the August 2008 issue of Research Magazine • Subscribe!

Oil's Not Well

The residential area around Columbia University is very quiet on summer afternoons. Some local restaurants don't bother to serve lunch, and empty tables at Metisse, the neighborhood bistro Professor Sick selects for our interview, provide a good indication why.

During the school year, Sick teaches graduate classes focusing on Iran at Columbia's School of International and Public Affairs, but his main job the year round, he explains, is that of Executive Director for the school's Gulf/2000 Project.

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Who: Gary Sick, Senior Research Scholar, Middle East Institute, Columbia University.Where: Metisse, 239 West 105 Street, New York, June 11, 2008On the Menu: Kabab, tapinade and Ahmadinejad

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Now, there are several gulfs to be found on the map of the world, with the Gulf of Mexico being both the largest and the closest to America's shores. Nevertheless, no one questions which gulf Sick's project is concerned with. Gulf/2000 Project is a subscription-only Web-based think tank where international scholars, political leaders and business executives obtain information and exchange opinions on the political situation around the Persian Gulf.

The economy and the war in Iraq are the top two issues of this year's U.S. presidential campaign. Ironically, both are centered on the Middle East. The United States, Sick asserts, is now a Middle Eastern power -- and the strongest one at that, with the region's most powerful military.

As for the economy, American households' economic woes, as well as voters' concerns, have a lot to do with gas prices surpassing $4 per gallon and heading higher. "There is no doubt that current oil prices incorporate a substantial political risk premium," says Sick.

Sure, oil traders are worried about possible shortages of oil. But any such shortages wouldn't happen before a decade from now. This is not why the price of oil has been bid up now, because currently oil supply and oil demand are basically in balance.

"Every time Bush threatens Iran by saying that all options are on the table, including the military one, oil spikes," says Sick.

High though oil prices already are, Sick disagrees with those who believe that the market has discounted a military strike against Iranian nuclear sites. "Prices would go a lot higher, and stay there, too, if the market really believed that an attack on Iran were imminent."

Sick doesn't hazard to forecast oil prices, but one thing he is certain about. No stranger to controversial conspiracy theories -- he supported the October Surprise hypothesis, which suggested that the Ronald Reagan presidential campaign had a hand in Iranian radicals' release of U.S. hostages in October 1980 -- this time he categorically dismisses speculation that an attack on Iran is imminent.

"It will not only fail to achieve its goals," he says. "It will be counterproductive."

The cost for the United States will be prohibitive, he says. Even if Iran won't be able to damage oil terminals on the Gulf, Iranian exports of some 2.5 million barrels a day will be removed from the market, pushing oil prices substantially higher. Iran will also retaliate against U.S. troops in Iraq and may attack America's allies in other parts of the Middle East, causing additional casualties and further destabilizing the region.

At the same time, Sick doesn't believe that Iran's dispersed nuclear sites could be eliminated with a neat surgical strike from the air. Even the extent of the damage won't be known for certain. But what is certain is that Iran will kick out international inspectors. We will lose our ability to know what goes on there at a time when Iran's leadership will have an added incentive to obtain the bomb.

Nor is Israel likely to try to solve unilaterally the threat that many in Israel believe Iran poses to its own existence.

"When Israelis bombed Iraq's nuclear reactor in 1981, the attack came completely out of the blue," says Sick. "When they destroyed a facility in Syria earlier this year, they didn't talk about it even after the fact. This time, every two-bit politician is shooting his mouth about the need to handle Iran. It just doesn't seem to be their usual way of going about such things."

Favors NegotiationsSick certainly doesn't think that Iran's leaders should have the technology to produce nuclear weapons. But he doesn't believe that a military strike is the way of discouraging it. A regime change is needed.

Ironically, he says that Iranians are probably better disposed toward the United States than any other nation in the Middle East except Israel. Iranians are tired of their 30-year-old Islamic revolution and are ready for a change.

But attacking Iran, he says, is the sure way of altering this perception. He is convinced that Iranians will rally around their discredited religious leaders and that support for Mahmoud Ahmadinejad, Iran's belligerent president, will instantly increase.

Moreover, a U.S. attack would give an excuse to the government to paint dissenters and reformers as traitors and America's puppets. The opportunity for a regime change will likely be delayed indefinitely.

What is the choice then?

Sick believes that there is no alternative to negotiations. Not paying off the Iranian leadership, but nevertheless giving incentives to Tehran to abandon large-scale nuclear enrichment. Perhaps allowing them to go ahead with a scaled-down program that could not produce weapons-grade materials -- which in any case they are allowed to do under the terms of the Nuclear Nonproliferation Treaty to which Iran is a signatory.

It is not the best alternative, he admits, but there is probably no other. "We should have started engaging with them 15 years ago," he says. "It was a bipartisan mistake to think that we could force them to do what we tell them. Now, the price of their cooperation has gone up, but it will have to be paid."

In Sick's view, the next U.S. President will be forced to negotiate with the Iranians, even if during the campaign there will be much tough talk and posturing.

Risk Premium to RemainIn addition, says Sick, talking and offering the Iranian leadership incentives to become more integrated into the global economic and political system would create more favorable conditions for a regime change.

It is a nice idea, but his views seem to contradict each other. He admits that some of Iran's top religious leaders are intransigent. Religious leaders could have dismissed Ahmadinejad and offered some concessions to Washington in order to diffuse the tensions. However, they clearly feel that the situation enhances their power.

Indeed, since the ayatollahs voluntarily disengaged with the rest of the world in the first place, why should they want to become bound by new ties to the international community -- especially if it could hasten a regime change?

But then again, the Middle East is the kind of place where a large number of people have prescriptions for how to solve its numerous problems. Yet, nothing seems to work. Peace is a rare commodity and policy successes can be counted on the fingers of one hand. The region is likely to keep Sick busy with the Gulf/2000 Project and to remain at the center of U.S. foreign policy well beyond the presidential campaign.

Unfortunately, it probably means that oil will continue to carry a risk premium for a long time to come.

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at abayer@kafanfx.com. His monthly "Global Economy" column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past five years, 2004-2008.

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