The economic cost of a nuclear Iran

The Wall Street Journal

Sanctions and U.S. military force carry risks, but Tehran with a bomb would wreak havoc on global markets.


After the looming fiscal cliff, the next major challenge facing the United States will be preventing Iran from obtaining a nuclear weapons capability. Living with a nuclear Iran is strategically untenable. Like the fiscal cliff, this is a matter of both economic and national security. Preventing Iran from acquiring nuclear weapons carries various risks, but inaction has its costs, too—especially to the price of oil and, in turn, to the U.S. economy.

International sanctions against Iran have already restricted its oil exports, reducing global supply and putting upward pressure on oil prices. But a military strike against the Islamic Republic could disrupt the flow of oil in the region, as Iran might retaliate against the West by attempting to close the Strait of Hormuz, through which one-fifth of the world's oil supplies pass.

The disruption of oil flows would have significant economic repercussions. Yet failure to stop Iran's nuclear-weapons program also would have myriad direct and indirect consequences. We led a Bipartisan Policy Center task force—including former elected officials, military leaders, diplomats, energy analysts and economists—that examined the energy-related costs of inaction.

Energy markets respond both to actual supply disruptions and to expected changes in supply and demand. A nuclear Iran would raise the likelihood of instability, nuclear proliferation, terrorism and war—and could thus drive oil prices up without disrupting the flow of oil.

To quantify this price impact, we identified five scenarios that an Iran with nuclear weapons would make more likely: domestic instability in Saudi Arabia, the destruction of Saudi energy facilities, an Iran-Saudi nuclear exchange, an Iran-Israel nuclear exchange, and the lapse of sanctions against Iran.

To isolate the worst-case scenario for the oil market—a Saudi-Iran nuclear exchange—we assessed that the probability of such an event would change from zero today (when neither country has nuclear weapons) to 5% within a year. This could lead to the disruption of 12 million barrels per day, or 13% of current global supply, due to the cessation of exports through those two countries for one year and a partial cessation from their neighbors.

Accounting for this scenario and the others, we calculated the total additional risk premium that an informed oil market might reflect after Iran has crossed the nuclear threshold—that is, the amount added onto the price of oil due to the possibility of supply disruption. We concluded that even if none of the above scenarios actually came to pass, the collective risk that they could would cause significant economic harm:

• Oil prices could rise by 10% to 25% in the first year (or $11 to $27 more per barrel). As instability and tensions remain high, so will prices, even rising as much as 30% to 50% ($30 to $55 per barrel) within three years.

• Consequently, gasoline prices could jump 10% to 20% in the first year. Within three years, the cost of gas could rise more than 30% (or more than $1.40 per gallon). Such sustained price increases would have a pronounced negative impact on the U.S. economy.

• U.S. gross domestic product could fall by about 0.6% in the first year—costing the economy some $90 billion—and by up to 2.5% (or $360 billion) by the third year. This is enough, at current growth rates, to send the country into recession.

• The unemployment rate could also rise by 0.3 percentage points in the first year and by nearly 1% two years later, resulting in some 1.5 million more Americans becoming jobless.

This economic pain could result even if the oil supply is never disrupted. Should Iranian-Saudi, Iranian-Israeli or other tension cause an actual disruption, the resulting economic dislocations could be dramatically worse. They could involve a doubling in the price of oil, gasoline soaring by as much as $2.75 more per gallon, U.S. GDP plummeting by 8% in one year, and five million Americans losing their jobs.

To be sure, such analysis, no matter how carefully done, involves as much art as science. Its value is in illustrating the range of impacts that could occur, not in predicting any precise outcome.

As American and other policy makers contemplate what it will take to thwart Iran's nuclear ambitions, they must not dwell exclusively on the potential short-term impacts of economic pressure or military action. Over the medium and long term, the economic costs of a nuclear Iran may be no less real and far more enduring.

Mr. Robb is a former Democratic senator from Virginia. Mr. Ross, now counselor at the Washington Institute for Near East Policy, was President Obama's special adviser on the Persian Gulf. Mr. Makovsky is foreign policy director of the Bipartisan Policy Center. All were members of the center's Iran Task Force, which recently issued the report, "The Price of Inaction."



Act of Cowardice

Iran's ruling tyrants have executed yet another political prisoner in flagrant violation of international law.  READ MORE

The rush to Tehran amidst rise in executions

World leaders should halt these visits and link any deal with Iran to its human rights record.  READ MORE

Arming a dictator

What if President Obama ordered the sale of arms to Syrian dictator to massacre his opponents? READ MORE

Slaughter intensifies under Rouhani

231 executions have occurred since the presidential election in June which brought to power Hassan Rouhani. READ MORE

Silence is not the answer

Iran: Bloody crackdown targeting dissidents aims at terrorizing the people into submission. READ MORE

Iran’s Murder Machine

The wheels of Iran's Murder Machine turn in tandem with its nuclear machine. READ MORE

What now?

The West must drop the dangerous pretence that talking to a regime not interested in listening constitutes the winning strategy. READ MORE

A facelift

This cosmetic facelift should not dupe the West into thinking that there are fresh prospects for a nuclear deal. READ MORE

An Act of Cowardice

The terrorist attack against Iranian exiles at Camp Liberty, Iraq, is another sign of Iranian regime's weakness. READ MORE

Much atalk about nothing

In Istanbul they merely agreed to talk about talking later in May in Baghdad, of all places. READ MORE

An unholy alliance

The brutal state-imposed bloodbath in Syria deserves uncompromising reproach. READ MORE

Iran cries for freedom

The clerical regime in Iran has predictably unleashed another wave of terror against the citizenry since the outburst of the latest string of mass protests beginning on 14 February. READ MORE

A new Iran policy

The latest round of nuclear talks had an all-too-familiar result: more time for Tehran and less time for the international community to prevent a nuclear-armed theocracy. READ MORE

Murder overlooked

What would the rest of us do if a mad gunman was in our midst, systematically murdering our fellow human beings in front of our eyes? The responsible amongst us would not look the other way, because that would serve as a source of encouragement for the murderers to carry on with their heinous acts unchecked. READ MORE

Standing up to Iran's executioners

The Iranian regime's malicious noose has yet again taken an innocent life. Political prisoner Ali Saremi, 63, was hanged in Tehran's infamous Evin prison after a lifetime of peacefully espousing human rights and democracy. READ MORE