Iran's Call to Use Oil As Weapon Falls Flat

Monday, January 5, 2009 1:10 PM

DUBAI, United Arab Emirates -- The call to use oil as a weapon against Israel's friends once would have echoed in capitals across the Middle East and struck fear in the West's heart. But even as the crisis in Gaza deepens, threats of an embargo by some officials in Iran and Bahrain are falling flat.

Key Persian Gulf producers like Saudi Arabia and even top officials in the countries behind the calls are keeping quiet, mindful that the latest Mideast flare-up is just one of a number of global conflicts on jittery traders' minds.

The shift - plus low oil prices in recent months and memories of the sharp drop in demand after the last Arab oil embargo - reflects a realization that angering key Western customers could endanger regional hopes for continued development.

"An oil embargo is just bad for business," said Serene Gardiner, oil products analyst at Standard Chartered Bank in Dubai. "In truth, it is cheaper to move prices with rhetoric."

The latest call for shutting out U.S. and other Western consumers came Sunday when Iran's official IRNA news agency quoted an Iranian Revolutionary Guard commander calling on Islamic countries to use oil as a weapon to end the fighting in Gaza.

Iran's foreign ministry did not seem to distance itself from Brigadier General Mirfaysal Bagherzadeh's comments when asked about them Monday.

"We do support any action for realizing two main steps: an immediate stop to the invasion and an end to the Gaza blockade," foreign ministry spokesman Hasan Qashqavi said.

Bagherzadeh is not among the country's top oil officials. Still, the suggestion from OPEC's second-biggest producer that oil exports to supporters of Israel might be cut rattled crude markets.

"While the violence in the Gaza Strip does not affect any oil supplies directly, the market fears involvement from other countries like Iran could aggravate the situation," commodities analysts from British bank Barclays PLC reminded investors in a Monday report.

The Iranian comments come days after members of Bahrain's lower house of parliament condemned Israeli attacks on Gaza and told the tiny kingdom's foreign minister that "all retaliation options" should remain open to Arab governments.

Lawmakers in the relatively minor oil producer - an important U.S. ally and host to the Navy's 5th Fleet - said Arab states should use economic weapons such as oil and the region's vast investment funds to pressure the West.

Arab oil producers most famously used control over crude supplies as a weapon during the 1973 Yom Kippur War between Israel and Arab armies led by Egypt and Syria. Their decision to stop shipments to the U.S. and other allies of Israel preceded a steep spike in the price of oil.

But analysts say times have changed.

"We're not in 1973. We've moved beyond that," said Raja Kiwan, a Dubai-based analyst with oil consultancy PFC Energy. "The Gulf realizes it's plugged into what's happening in the rest of the world."

The region's emerging power brokers are embracing more pragmatic politics increasingly distant from the rhetoric-fueled diatribes of the past. Saudi Foreign Minister Saud al-Faisal, for example, has repeatedly said Riyadh would not use oil as a weapon.

In large part, that stance _ a complete about-face from the days preceding the 1973 embargo _ stems from a renewed focus on economic development that hinges on careful management of energy resources.

Despite declining oil revenues at the current lower prices, leading producer Saudi Arabia and some other countries like the United Arab Emirates recently set new budgets that call for ramped-up spending on key services and sectors such as education and health care.

Countries in the region are also racing to diversify their economies before oil profits run out, seeking to establish themselves as financial, tourism and commercial hubs with glittering skyscrapers and other awe-inspiring attractions.

"Oil resources are for the development of countries," said Abdel Aziz Daghestani, an independent Saudi economist and analyst when asked about the Iranian general's oil-as-weapon proposal.

Rivalries, especially Saudi Arabia with Iran, also play a role.

But even in Iran, it's unlikely that Bagherzadeh's call would get much traction. A day after the suggestion, Iran's OPEC governor said the oil producing group was to meet in February, a month ahead of schedule, to take stock of the current market situation.

The conflicting messages highlight the challenge confronting Tehran's hardline government. Like other oil producers in region, it depends on oil revenue for as much as 90 percent of its foreign income _ and is suffering badly as oil prices fall.

As a key backer of Hamas and the Lebanese Shiite militia Hezbollah, Iran also needs the money to fuel its proxy fights against Israel and the Arab nations that are ideological opposites, particularly Saudi Arabia.

Halting oil sales would, in short, be akin to Iran shooting itself in the foot and hoping the ricochet also harmed the West.

"They cannot afford to reduce production, full stop," Standard Chartered's Gardiner said.

© 2009 Associated Press.