Iran confirmed on Thursday that it has booked a supertanker to store up to 270,000 tons of crude oil for up to 90 days. The Very Large Crude Carriers (VLCCs) that Iran commissioned from Singapore-headquartered Tanker Pacific are expected to arrive in Iran the first week of June. Iran already has more than 28 million barrels of oil floating in tankers outside its main export terminal in the Persian Gulf. The fleet of tankers storing this crude is owned by NITC, a subsidiary of state-owned oil firm National Iranian Oil Co. (NIOC), and has a capacity of more than 30 million barrels of crude — the equivalent of more than a week of Iran's oil output. There is something very wrong with this picture. With oil prices soaring above $127 per barrel, any energy-producing country would be jumping at the opportunity to sell its crude and reap hefty profits. The Iranians, however, are choosing to store a huge bulk of their crude offshore in large tankers. Instead of making money off crude sales, Iran is expending loads of petrodollars to store nearly 30 million barrels of crude for weeks. Storing crude in offshore tankers for long periods of time is certainly not cheap. So, what is Iran up to? There are several possible explanations to Iran's curious energy policy. Some energy analysts have speculated that Iran is holding out for a better market price to sell its oil. But with oil prices already hitting record highs, this explanation does not add up. Another explanation is that the current policy is a result of the NIOC's inferior management skills — which is certainly possible, given Iran's poor track record in managing its investment-deprived energy sector. The intent behind such a policy would be for Iran to manipulate global crude prices by reducing exports and driving up demand. Iranian President Mahmoud Ahmadinejad already threw around threats in recent days to cut Iranian oil output, sending jitters through the energy market that ended up pushing oil prices to $127 per barrel. From the standpoint of the Iranian Energy Ministry, the threats to reduce output combined with a reduction in exports could drive up prices further and allow the Iranians to get a better deal on their crude sales. But it appears that the Iranians already tried this strategy — and failed — in the summer of 2006. Beginning in March of that year, the Iranian government issued threats that it would cut its crude production while storing around 20 million barrels of oil in tankers. But instead of selling at a higher price, the Iranians found that oil traders simply looked elsewhere to make up for the difference. In the end, the Iranians wound up selling the bulk of that crude at a major discount to Royal Dutch/Shell and India's Reliance. Moreover, Iran is highly unlikely to follow through with its threats of dropping crude output. The Iranians are already producing oil at capacity at 4.02 million barrels per day (bpd). With the Iranian oil sector accounting for approximately 80 percent of Iran's total exports (with 12 percent of the country's gross domestic product absorbed in energy subsidies), the country cannot afford to cut production and absorb the loss in income. Despite being the world's fourth-largest oil producer, Iran is also the world's second-largest importer of gasoline due to its faltering refining sector; and it is a major food importer. With food prices and inflation rising, Iran is all the more dependent on its oil revenues to maintain internal political stability, and it would be shooting itself in the foot if it took the hit of cutting its oil output. The more likely reason behind Iran hoarding its oil is a drop in demand for Iranian crude — which spells far more serious consequences for the Islamic Republic. Iran's main oil export is a heavy crude that is difficult for refiners to convert into transport fuel. Most of the oil currently being stored off the Iranian coast comes from the Soroush and Nowruz fields, which produce approximately 190,000 bpd of low-quality, high-sulfur crude. Iran has already had a difficult time finding buyers for this heavy sour crude, but still is highly reluctant to cut the price down. The Iranians appear to have now reached a point where they have little choice but to take the hit in income and store the crude, in the hopes that demand for their product will rebound. The main energy clients for Iranian crude include Japan, China, India, South Korea, Italy and other Organization for Economic Cooperation and Development nations. But as the global food crisis worsens and inflation rates continue to soar worldwide, these countries will be loath to put up with Iran's high prices for low-quality crude. Iran can easily disguise its energy woes with rhetoric on how it is punishing the West by cutting output and driving up global crude prices. These threats will continue to send a jolt through energy investors and bump up prices a notch or two. But Iran will have a much harder time reaping the benefits of high energy prices as long as its energy income is strained by a drop in demand for its crude. Oil is the backbone of the Iranian economy, and if Iran is resorting to storing up loads of crude in the Gulf for lack of buyers, its financial — and thus internal political — stability will soon be coming into serious question. It's important to remember that Iran has an incredibly delicate social stability index to manage, with only about 55 percent of its population composed of ethnic Persians. The remaining population is made up of ethnic minorities who are kept in check by Tehran through a combination of military force and heavy state subsidies. If it is already having trouble sustaining its oil exports — and its economic problems continue to worsen — Iran runs the risk of losing its ability to function as a state, much less an aggressive one.