Unthinkable (78 page)

50.
 For two assessments of the dynamic balance of Arab and Israeli military capabilities across the history of the Arab-Israeli wars, see Anthony H. Cordesman and Abraham R. Wagner,
The Lessons of Modern War,
vol. 1.
The Arab-Israeli Conflicts, 1973
–1
989
(Boulder, Colo.: Westview, 1990); Kenneth M. Pollack,
Arabs at War: Military Effectiveness, 1948
–1
991
(Lincoln: University of Nebraska Press, 2002).

51.
 Thom Shanker, “U.S. and Gulf Allies Pursue a Missile Shield Against Iranian Attack,”
New York Times
, August 8, 2012.

52.
 This amount is the projected cost of the similar system being built to provide coverage of the U.S. homeland against future intercontinental ballistic missiles launched from Iran or North Korea, and which the Congressional Budget Office has suggested could also be built to defend Europe against Iranian ballistic missiles. Making the assumption that a similar system would be required to provide the same coverage of the Middle East, it seems reasonable to assume that the cost would be roughly equivalent. See “Options for Deploying Missile Defenses in Europe,” Congressional Budget Office, February 2009, pp. x, 21.

53.
 For such arguments, see Bracken,
The Second Nuclear Age
, pp. 245–70; Lieber and Press, “The Rise of U.S. Nuclear Primacy,” pp. 42–54; Lieber and Press, “The End of Mad?,” pp. 7–44; Lieber and Press, “U.S. Nuclear Primacy and the Future of the Chinese Deterrent,”
China Security,
No. 5 (Winter 2007): 66–89; Payne,
The Fallacies of Cold War Deterrence
, pp. 97–196. For a contrary perspective, see Michael E. O'Hanlon and Steven Pifer,
The Opportunity: Next Steps in Reducing Nuclear Arms
(Washington, D.C.: Brookings Institution Press, 2012).

54.
 For hints at the extent to which U.S. intelligence may already be blanketing Iran, see “Iran Acknowledges Espionage at Nuclear Facilities,” Associated Press, October 9, 2010; Tabassum Zakaria and Phil Stewart, “Drone Crash Unmasks U.S. Spying Effort in Iran,” Reuters, December 10, 2011.

55.
 Jeremy M. Sharp, “U.S. Foreign Aid to Israel,” RL33222, Congressional Research Service, March 12, 2012, p. 30.

56.
 Herb Keinon, “US Senator Rand Paul Set to Visit Israel,”
Jerusalem Post
, January 3, 2013; Sharp, “U.S. Foreign Aid to Israel,” pp. 5–6.

57.
 Sharp, “U.S. Foreign Aid to Israel,” pp. 8–15.

58.
 Charles Robb, Dennis Ross, and Michael Makvosky, “The Economic Cost of a Nuclear Iran,”
Wall Street Journal
, December 17, 2012.

59.
 Interview with Robert McNally, Washington, D.C., February 2013; Office of Technology Assessment,
U.S. Oil Import Vulnerability: The Technical Replacement Capability
, OTA-E-503 (Washington, D.C.: U.S. Government Printing Office, 1991), pp. 12, 39.

60.
 To date, there has been only one effort to try to predict both the risk premium and potential price spikes stemming from Iran's acquisition of a nuclear capability. This is the report prepared under the auspices of the Bipartisan Policy Center called “The Price of Inaction: An Analysis of Energy and Economic Effects of a Nuclear Iran” (October 10, 2012, available at
http://bipartisanpolicy.org/sites/default/files/Iran%20Report.pdf
). This report was the product of a group of people consisting of some terrific oil analysts and some equally terrific but quite conservative policy analysts—without
any true experts on Iran or Saudi Arabia. Nearly all of the policy analysts in the group have publicly opposed containment and generally favor air strikes to prevent Iran from acquiring nuclear weapons. The report's conclusions are not credible, and I suspect that they were badly compromised by this “selection bias.”

The methodology of the group (described at greatest length at “The Price of Inaction,” pp. 37–41) was to devise four scenarios in which a nuclear Iran might take actions that could affect the production/export of oil (five scenarios are presented, but the group inexplicably dropped from their calculus the one scenario that predicted that Iran's acquisition of nuclear weapons might bring
down
the price of oil, further distorting the calculus). The group then assigned probabilities to these scenarios occurring, as well as projections of how much of a disruption each scenario would cause, both in terms of a maximum loss of oil to the international market, and an impact over time that allowed for various forces to compensate and mitigate the loss. These inputs were then plugged into some standard models related to oil price fluctuations.

The problem with the report is that its conclusions are entirely driven by the wholly subjective estimates of the likelihood and extent of the disruptions posited in the various scenarios, all of which are deeply problematic.

The first scenario the group posits is that a nuclear Iran stirs up internal problems in Saudi Arabia, particularly among the Kingdom's Shi'a population, heavily concentrated as they are in the oil-producing regions of eastern Saudi Arabia. This is a reasonable expectation (although it is hardly a certainty, either). But then the group made a series of highly questionable judgments. First, they assume that this “unrest” causes a loss of all Saudi oil exports—all 7.7 million barrels per day (bpd), representing 8 percent of global oil consumption—for six months, slowly recovering from there, but representing an annualized loss of 5.1 million bpd. (The report states explicitly that these export losses are a result of unrest affecting production—in its words, “An uprising there could disrupt production, driving up prices”—and makes no mention of unrest affecting exports in this scenario. “The Price of Inaction,” p. 15.) A disruption of this magnitude would be the largest in history,
ever
. By comparison, the Iranian Revolution caused a loss of roughly 4.6 million bpd, amounting to 78 percent of Iranian production and roughly 7 percent of global consumption at the time. Prior to the 2003 invasion, Iraq produced 2.8 million bpd, only to see that fall as a result of its civil war to 1.8 million bpd in 2005 (its lowest level), representing a decrease of 36 percent. Thus, the worst revolution in
a Persian Gulf oil producer, and the worst civil war in a Persian Gulf oil producer, still had less of an impact on oil than this scenario posits. Creating such a drastic cut in Saudi production or exports would require a hell of a lot more than “unrest”—it would require a full-scale revolution worse than the Iranian Revolution or a civil war worse than the Iraqi civil war. Yet the group assigned this scenario a probability of occurrence of 40 percent within three years after Iran acquired a nuclear weapon.

I would never suggest that a revolution in Saudi Arabia is inconceivable, especially one derived from the same forces that produced the various revolts in Tunisia, Egypt, Libya, Bahrain, Jordan, and elsewhere during the Arab Spring of 2011. I warned of this possibility even before the Arab spring. (See Pollack,
A Path Out of the Desert
, pp. 133–220.) However, revolutions are rare events in history—especially successful ones—and it would require a “successful” revolution to cause the kind of disruption this scenario posits. In other words, it could not be a large-scale revolt that gets crushed by Saudi security forces, because at no time in history has such a failed revolution caused anything like the kind of oil disruption that this scenario posits. Moreover, as the great historians of revolution—Brinton, Skocpol, Moore, etc.—have repeatedly shown, the vast majority of attempted revolutions are crushed long before they rise above the level of scattered street protests. The Saudis have faced would-be revolutions on at least a half dozen occasions that we know of dating back to 1979 and they have crushed every one of them without the slightest impact on their oil production. Likewise, the only real scenario for a civil war of similar magnitude in the Kingdom would be one sparked by a revolution that successfully challenged the regime's grip on power, as in Libya in 2011 and Syria since 2011. Thus the notion that there is a 40 percent likelihood of a successful Saudi revolution or civil war occurring within three years of Iran crossing the nuclear threshold is completely out of whack with historical norms and the history of Saudi Arabia. Successful revolutions are so rare that even if we accept (as I do) that it is a much more likely possibility in Saudi Arabia at this period of time than it is for most states at most times, the likelihood of a successful revolution is still exceptionally low probability—historically speaking more like 4 percent than 40 percent likelihood, and that would still represent several orders of magnitude higher risk than is the norm for most countries at most times.

However, the report compounds this mistake by then asserting that this successful revolution in Saudi Arabia would be
caused
by Iran's acquisition of a nuclear capability (an even lower probability than the likelihood of a revolution or civil war occurring at all). As rare as successful revolutions
are in history, rarer still are those that are caused by the actions of another state. At most, the actions of other states can exacerbate the conditions that produce a revolt (successful or unsuccessful). However, the methodology of the report attributes the problem entirely to the actions of the other state—in this case Iran. It is worth noting that Iran has never caused a successful revolution despite all its long years of trying. So this would be a first.

In other words, the report does not distinguish between a risk premium created by general Saudi internal fragility, which would compose the majority of the premium, and then add on to that an additional increment that would represent the prospect that Iranian action might be the straw that broke the camel's back and triggered the revolt. Instead, it assumes that
all
risk of a Saudi revolt must be attributed to Iranian acquisition of a nuclear weapon. Thus the report takes its horribly inflated probability estimate of a successful Saudi revolt to generate an estimate of the impact of this supposition on the future price of oil
and attributes it entirely to the impact of Iran's acquisition of nuclear weapons
.

As a point of comparison, here is how I might do the math. I might agree that there is a 40 percent chance of
unrest
in Saudi Arabia at any three-year period of the next decade, but by unrest I mean demonstrations, riots, strikes, and the like. In the vast majority of these cases, such unrest would likely have little or no direct impact on Saudi oil production (although it doubtless would still spook the oil market, albeit to a far lesser degree than unrest that actually did have an impact on oil production). Given the Kingdom's significant economic, political, and social problems coupled with the challenge of succession beyond the sons of Ibn Sa'ud, I might put the likelihood of an actual Saudi revolution or civil war during this period at about 4 percent, which as I have already noted, is probably an order of magnitude higher than the historical norm for any given government during any given three-year period of time. I would rate the likelihood that a nuclear Iran would be responsible for causing a revolution or civil war in Iran far, far lower—maybe a 1 percent chance if I were being generous, maybe one one-hundredth of that if I were being more realistic. Iran certainly has some capability to stir trouble in the Kingdom, but there is absolutely no evidence to suggest that they could stir unrest on the scale posited by the report and heaps of evidence to the contrary. Indeed, even if the Iranians really could move Iran's small Shi'a population (about 10–15 percent of the overall population) to open revolt, the most likely scenario would be that the revolt would be crushed swiftly and thoroughly by the majority Sunnis, who dominate the country's highly efficient security
services. Consequently, taking all of these probabilities together and then calculating the impact on the price of oil, the risk premium from an Iranian-inspired revolution or civil war in Saudi Arabia producing an unprecedented shutdown of Saudi oil production would be extremely small.

The other three scenarios that the report chose to retain as part of its calculus all have similar problems. And because the report's estimates of both the oil risk premium and potential price spikes created by Iran's acquisition of nuclear weapons depend on the probabilities assigned by the group to these four scenarios occurring (and occurring in the magnitude postulated), I find no reason to accept its estimates of either price.

61.
 Joby Warrick and Steve Mufson, “Iran Threatens U.S. Ships, Alarms Oil Markets,”
Washington Post
, January 3, 2012.

62.
 Matthew Kroenig and Robert McNally, “Iranian Nukes and Global Oil,”
American Interest
8, No. 4 (March/April 2013): 45.

63.
 James D. Hamilton, “Historical Oil Shocks,” paper prepared for the
Handbook of Major Events in Economic History
, February 1, 2011, available at
http://dss.ucsd.edu/~jhamilto/oil_history.pdf
, pp. 20, 33.

64.
 Sharon Epperson, “Oil Risk Premium Rising on Iran Concerns,”
CNBC.com
, February 23, 2012, available at
http://www.cnbc.com/id/46487538/Oil_Risk_Premium_Rising_on_Iran_Concerns
; Jonathan Ratner, “ ‘Iran Premium' Not Reflected in Oil Prices: Goldman,”
Financial Post
, January 11, 2012; Konstantin Rozhnov, “Iran Talks in Early 2013 to Boost Oil Risk Premium, SocGen Says,” Bloomberg, December 21, 2012; “How Much Iran Premium in Oil Prices Is Justified?”
SoberLook.com
, March 18, 2012, available at
http://soberlook.com/2012/03/how-much-iran-premium-in-oil-prices.html
.

65.
 Of course, the costs of containment can only be measured relative to the costs of its alternatives, particularly the military option, a task I take up in the concluding chapter of this book. See also, John Allen Gay, “Should We Bomb Iran to Save Money?”
National Interest
online, December 27, 2012, available at
http://nationalinterest.org/commentary/should-we-bomb-iran-save-money-7906
.