Oil revenues fuel resistance to U.S.

Iran, Venezuela and Russia are flush with petroleum money, a buffer allowing them to challenge perceived American dominance.

By Kim Murphy
Times Staff Writer

11/12/06 "LA Times" -- -LONDON — Iran maintains a costly nuclear program while spending billions to subsidize everything from apartments to gasoline. Russia defies international demands to give up a monopoly on oil pipelines to Europe. Venezuela sends aid to countries around the globe in an effort to expand its influence.

What all three have in common are treasuries swollen by the high price of oil.

The increase in oil prices is the common denominator in some of Washington's most implacable foreign policy challenges. From the U.S. government's perspective, oil money empowers regimes to defy American policy on a host of key issues, including nuclear nonproliferation and human rights.

Viewed another way, oil allows developing nations to challenge what their leaders see as years of lopsided U.S. dominance over international markets and the politics of the Middle East, Latin America and Central Asia.

Oil prices hit $78 a barrel in July. Although they have slid to about $60 since then, they remain more than twice as high as they were five years ago. With American demand for oil high and China and India rapidly increasing consumption, most analysts predict that petroleum will remain expensive for the foreseeable future.

For producing nations, the result has been a flood of revenue that "gives them leeway to pursue their own strategic and political objectives to a degree that they had not before," said James R. Schlesinger, a former U.S. secretary of Energy as well as Defense.

"I can mention Iran, I can mention Venezuela as glaring cases. Russia is also a prominent case in that regard. It is also true that the revenues that have been generated by these high oil prices have spilled over into the availability of funds for terrorist groups," he said.

Schlesinger and many other energy-policy experts fault U.S. officials for failing to do enough to counter rising oil prices. Schlesinger co-chaired a task force of the Council on Foreign Relations that said last month that high U.S. oil consumption was "undercutting U.S. foreign policy and national security" and criticized the Bush administration for failing to take effective steps to reduce American consumption of gasoline and other oil products.

The administration has pushed for new drilling to boost domestic production but has resisted efforts to raise gasoline taxes or boost vehicle mileage standards, saying those measures would hurt the economy.

The task force suggested, however, that failing to reduce demand for oil could have a greater cost in undermining U.S. policy abroad.



Power and oil money

Richard Allen, a national security advisor to President Reagan, said in an interview, "The nexus between political power and oil money has long ago been demonstrated.

"When money from natural resources is married to political power that has malign intent, that inevitably has an effect on our relationships and our interests," he said.



Iran provides one prominent example. Tehran's oil revenue has shot up to an expected $55 billion this year, sharply higher than forecast. Over the last eight years, the nation, the Organization of the Petroleum Exporting Countries' second-biggest producer, has earned $300 billion from oil exports.

Last year, the Islamic Republic increased defense spending to $6.2 billion while continuing to provide what American officials say is at least $100 million a year to Hezbollah, the radical Shiite Muslim group in Lebanon. Washington says Hezbollah used the funds to buy the rockets it fired into Israel.

During Hezbollah's war with Israel this summer, Iran's supreme leader, Ayatollah Ali Khamenei, met with Venezuelan President Hugo Chavez and praised the Lebanese group.

"The courageous resistance of the Lebanese people and Hezbollah is the manifestation of the rebellious spirit of Muslim and Arab nations against America," he said.

U.S. officials say Iran is also funneling aid to Shiite militias in Iraq and providing millions of dollars to the Hamas-led government in the Palestinian territories. The U.S. government has sought to isolate Hamas, which it regards as a terrorist organization bent on Israel's destruction.

More fundamentally, oil money has shored up domestic support for Tehran's controversial nuclear program, significantly reducing the chance that economic sanctions would cause Iranian voters to turn against the government.



Payment of foreign debt

Another prominent example of an oil-rich country Washington regards as problematic is Russia, which is expected to take in nearly $110 billion this year from petroleum exports in addition to substantial revenue from supplying about one-quarter of Europe's natural gas.

Moscow has used that money to pay off $22 billion in foreign debt early and buy back much of its oil industry — thereby encouraging foreign investors to quit the country.

Oil money also has helped Russia rebuild its military strength. Moscow's oil stabilization fund, the rainy-day catch basin for excess oil revenue, has reached $55 billion. Gold reserves are expected to exceed $300 billion by 2009.

"The long period of high oil prices is a serious factor that has helped Russia to challenge the United States over almost every foreign policy dispute," said Dmitry Oreshkin, senior analyst with the Institute of Geography of the Russian Academy of Sciences in Moscow.

"Without lowering the living standards of the population … the ruling elite has been able to conduct a more aggressive foreign policy [while] … at the same time enjoying the support of a significant part of the Russian population who, like the leadership, are experiencing a thirst for historic revenge," he said.

"Russia would have behaved much more cautiously in its foreign policy if it were still in need of Western loans."



Run for U.N. council seat

Venezuela is expected to collect about $37 billion this year in oil earnings and has used the money to expand the international influence of Chavez, including an unsuccessful effort to win a seat on the United Nations Security Council.

Chavez's assertiveness has a parallel in a previous era of high oil prices, said Francisco Monaldi, academic coordinator at the International Center for Energy and Environmental Studies in Caracas, the Venezuelan capital.

During the late 1970s, when prices were high, then-Venezuelan President Carlos Andres Perez nationalized the oil industry, denounced the International Monetary Fund and said OPEC should use its power over oil prices to change the international status quo.

A decade later, when Perez held office again during a period of low oil prices, he accepted a $4.5-billion loan from the IMF and took "a more moderate view of the role he would play on the international stage," Monaldi said.

"I think this is sort of an amazingly simple experiment" in how oil prices can change a country's global posture, he said.

But Venezuela's experience also shows that price declines can upend producing countries accustomed to high spending.

This time around, Iran could be particularly exposed if prices were to drop. From the time of his election in June 2005, Iran's president, Mahmoud Ahmadinejad, has pledged to "take oil revenues to people's dinner tables." The results have included major new spending programs that provide loans to newlyweds to rent apartments, business start-up loans and discounts to low-income Iranians seeking to buy a share in the nation's privatizing enterprises.

Last month, Ahmadinejad handed out the first shares in Iran's state industries to an estimated 4.6 million citizens. The shares will provide about $2,200 worth of stock to the poorest segments of the population at a 50% discount. The program ultimately could total $140 billion. A separate fund for loans to small businesses has a balance of $27 billion.

Price subsidies for consumers, mainly on energy, now take up more than one-fifth of Iran's gross domestic product, said Saeed Leylaz, an economic analyst in Tehran. Iranians pay only about 9 cents a liter for gasoline (roughly 34 cents a gallon), a subsidy that will cost the government more than $5 billion this year. Iran would face economic catastrophe if the price of oil dropped below $50 a barrel, Leylaz said in a telephone interview.

"Immediately after any decrease in the oil price, my prediction is that inflation will go up very fast, and the social structure of the country, which is very fragile and sensitive now, will be in a dangerous position," he said.

Indeed, some analysts argue that a sharp drop in prices could cause more problems than the current high cost of oil.

"Yes, these regimes are annoying," said A.F. Alhajji, an associate professor of economics at Ohio Northern University. But "all three regimes are democratically elected," he said. "They have to answer to the people who elected them, and if they don't, then we're going to see political problems within each of these countries, and political problems mean a threat to oil supplies.

"These citizens, when they have a house to live in, food to eat, jobs to work at — as long as they're working, they're not going to go to the streets or bomb pipelines."


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kim.murphy@latimes.com

Times staff writer Sergei L. Loiko in Moscow and special correspondent Babak Pirouz in Tehran contributed to this report.