Economic Sanctions, Oil, and Iran
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S. HRG. 109–720 ENERGY AND THE IRANIAN ECONOMY HEARING BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ONE HUNDRED NINTH CONGRESS SECOND SESSION JULY 25, 2006 Printed for the use of the Joint Economic Committee ( U.S. GOVERNMENT PRINTING OFFICE 30–856 PDF WASHINGTON : 2007 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 09:08 Jan 25, 2007 Jkt 030856 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\DOCS\30856.TXT DianeA PsN: DianeA JOINT ECONOMIC COMMITTEE [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] HOUSE OF REPRESENTATIVES SENATE JIM SAXTON, New Jersey, Chairman ROBERT F. BENNETT, Utah, Vice Chairman PAUL RYAN, Wisconsin SAM BROWNBACK, Kansas PHIL ENGLISH, Pennsylvania JOHN SUNUNU, New Hampshire RON PAUL, Texas JIM DEMINT, South Carolina KEVIN BRADY, Texas JEFF SESSIONS, Alabama THADDEUS G. MCCOTTER, Michigan JOHN CORNYN, Texas CAROLYN B. MALONEY, New York JACK REED, Rhode Island MAURICE D. HINCHEY, New York EDWARD M. KENNEDY, Massachusetts LORETTA SANCHEZ, California PAUL S. SARBANES, Maryland ELIJAH CUMMINGS, Maryland JEFF BINGAMAN, New Mexico CHRISTOPHER J. FRENZE, Executive Director CHAD STONE, Minority Staff Director (II) VerDate 11-MAY-2000 09:08 Jan 25, 2007 Jkt 030856 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 C:\DOCS\30856.TXT DianeA PsN: DianeA C O N T E N T S OPENING STATEMENT OF MEMBERS Hon. Jim Saxton, Chairman, a U.S. Representative from New Jersey ............... 1 Hon. Jack Reed, Ranking Minority, a U.S. Senator from Rhode Island ............. 2 WITNESSES Statement of Hon. Paul E. Simons, Deputy Assistant Secretary for Economic and Business Affairs, Department of State ....................................................... 3 Statement of Dr. Kenneth Katzman, Specialist in Middle Eastern Affairs, Congressional Research Service, Library of Congress ...................................... 16 Statement of Ilan Berman, Vice President for Policy, American Foreign Policy Council .................................................................................................................. 19 Statement of Dr. Andrew K. Davenport, Vice President, Conflict Securities Advisory Group, Inc ............................................................................................. 21 Statement of Dr. Jeffrey J. Schott, Senior Fellow, Institute for International Economics ............................................................................................................. 24 SUBMISSIONS FOR THE RECORD Prepared statement of Representative Jim Saxton, Chairman ........................... 36 Joint Economic Committee’s Research Report No. 109–31 entitled, ‘‘Iran’s Oil and Gas Wealth,’’ March 2006 ............................................................... 37 Prepared statement of Senator Jack Reed, Ranking Minority ............................ 41 Prepared statement of Hon. Paul E. Simons, Deputy Assistant Secretary for Economic and Business Affairs, Department of State ................................ 43 Prepared statement of Dr. Kenneth Katzman, Specialist in Middle Eastern Affairs, Congressional Research Service, Library of Congress ......................... 45 Prepared statement of Ilan Berman, Vice President for Policy, American Foreign Policy Council ......................................................................................... 50 Prepared statement of Dr. Andrew K. Davenport, Vice President, Conflict Securities Advisory Group, Inc ........................................................................... 54 Prepared statement of Dr. Jeffrey J. Schott, Senior Fellow, Institute for International Economics ...................................................................................... 58 (III) VerDate 11-MAY-2000 09:08 Jan 25, 2007 Jkt 030856 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 C:\DOCS\30856.TXT DianeA PsN: DianeA VerDate 11-MAY-2000 09:08 Jan 25, 2007 Jkt 030856 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 C:\DOCS\30856.TXT DianeA PsN: DianeA ENERGY AND THE IRANIAN ECONOMY TUESDAY, JULY 25, 2006 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. The Committee met, pursuant to notice, at 10 a.m., in room 210, Cannon House Office Building, Hon. Jim Saxton (Chairman of the Committee) presiding. Representatives present: Saxton, English, Hinchey, Sanchez, and Cummings. Senators present: Reed. Staff present: Chris Frenze, Ted Boll, Colleen Healy, Katie Jones, Chad Stone, and Kasia Murray. OPENING STATEMENT OF HON. JIM SAXTON, CHAIRMAN, A U.S. REPRESENTATIVE FROM NEW JERSEY Representative Saxton. Good morning. It is a pleasure to wel- come Mr. Simons, and the members of the second panel of wit- nesses before the Committee today. Given the course of events in the Middle East, this hearing on energy and the Iranian economy is very timely. Iran is a country with immense wealth in the form of oil and gas reserves. Iran has the third largest oil reserves and the second largest national gas reserves in the world. Unfortunately, despite the country’s great economic potential, the government of Iran has adopted policies that have undermined the country’s economic development and standard of living. Despite Iran’s huge oil and gas reserves, the Iranian regime is intent on extending its nuclear program, supposedly for peaceful purposes. However, the regime’s deception regarding the nuclear program, its aggressive promotion of terrorism, and its President’s recent state- ments concerning Israel obviously constitute a grave threat to world peace. The facts before us today concerning Iran’s large energy reserves undercut assertions by the Iranian regime that the nuclear pro- gram is needed for peaceful nuclear power generation. Iran’s leaders have also sought to intimidate oil-consuming na- tions by threatening to cut off Iranian oil. However, Iranian oil ex- ports generate a high percentage of Iranian export earnings and fi- nance a significant portion of government spending. In short, the Iranian Government and economy are highly dependent on oil ex- ports and threats to cut off these oil exports do not seem credible. The Iranian economy labors under a heavy burden of government mismanagement, cronyism and corruption, facilitated by govern- ment-affiliated foundations and enterprises. The Iranian people (1) VerDate 11-MAY-2000 09:08 Jan 25, 2007 Jkt 030856 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\30856.TXT DianeA PsN: DianeA 2 pay a high price for the failures of the regime’s economic policies, but the prospects for reform of these policies are bleak in the near term. In view of the Iranian regime’s aggressive behavior, the feasi- bility of sanctions against the regime must be considered. Iran’s re- liance on imported gasoline is one potential pressure point. How- ever, the effectiveness of sanctions would depend on the willingness of a much broader group of nations acting in concert with the United States to contain Iran’s threats. The coming weeks and months will reveal whether a broader attempt to impose sanctions will be tried and produce positive results. At this point I would like to yield to Senator Reed for any com- ments he may have. [The prepared statement of Representative Saxton appears in the Submissions for the Record on page 36.] OPENING STATEMENT OF HON. JACK REED, RANKING MINORITY, A U.S. SENATOR FROM RHODE ISLAND Senator Reed. Thank you very much, Mr. Chairman. I think this is a very timely and important hearing and I commend you for calling it. As we monitor diplomatic developments surrounding the nuclear standoff with Iran and as the current conflict between Israel and Hezbollah continues to destabilize the region, this hear- ing on energy and the Iranian economy is very important and very timely. Iran has recently enjoyed strong economic growth primarily due to high oil prices. Despite some progress in reforming certain as- pects of the economy, the Iranian economy continues to suffer some significant structural weaknesses. First, its heavy reliance on oil revenues makes it extremely vulnerable to oil price shocks. Second, entrenched political interests impede substantive economic reform. Last, the country continues to rank poorly on various indicators of foreign investment risk. Such vulnerabilities lead some observers to conclude that the United States and its allies may have some leverage primarily through sanctions, possibly backed up by the threat of military ac- tion, in convincing Iran to abandon any nuclear weapons ambi- tions. However, oil prices are expected to remain high at least through 2007, and with the global oil market Iran will always find alternative customers in countries that are willing to violate sanc- tions to advance their own interest. Even if Iranian oil exports were to slow somewhat, the higher prices that result would at least temporarily cushion the revenue impact. Iran’s vast energy reserves promise that the country will remain attractive to foreign investors. Russia and China recently signed on with the United States and its European partners in seeking a United Nations Security Coun- cil resolution ordering Iran to freeze its nuclear program or face possible sanctions. To be truly effective on their own, sanctions must target the oil exports that are central to the Iranian economy. Given tight oil supplies, however, it is highly unlikely that all six negotiating part- ners would ultimately agree to such comprehensive