Europeans fear Iran oil embargo will wreck economy

With a proposed embargo on Iranian oil, the European Union and the US could suffer from rising oil prices while Iran simply finds new buyers.

|
Vahid Salemi/AP/File
In this 2008 photo Iranian oil technician Majid Afshari checks the oil separator facilities in Azadegan oil field, near Ahvaz, Iran.

The European Union is poised to ban Iranian oil imports, even as critics warn the move could bring deep economic pain to the continent while doing little to change the course of the Iranian nuclear program.

Iran is playing a game of political chicken with the EU and US. Iran loses if it can't sell its oil.  But its leaders are calculating that the tight oil market and a weak global economy will prevent the West from being able to persuade others to join their embargo, allowing Iran to simply find new customers. The outcome is completely uncertain, but it will have a substantial impact on the global economic recovery.

On Jan. 23, The EU's foreign ministers are expected to officially approve an embargo on Iranian oil after agreeing in principle to the move earlier this month. They'll likely agree to enforce the import ban from July, in order to give countries time to make alternate import arrangements – a middle ground between the three months delay that some want and the 12 months others prefer. The more Iranian oil each EU member relies on, the less enthusiastic they are about quick implementation, say EU and Spanish officials and the International Energy Agency, which advises OECD countries on energy issues. 

EU leaders have gradually warmed to the idea of targeting Iran’s oil industry – which contributes about half of the Islamic Republic’s budget – in hopes of compelling its leaders to forgo uranium enrichment that could eventually be used to develop nuclear weapons. So far, Iranian leaders have only grown more defiant in response to more pressure. 

The oil embargo is just one facet of a complex game and passionate tit-for-tat threats from Iran and the US, Europe, and Israel that will have a dramatic impact on global supply lines. Iran recently threatened to close the Strait of Hormuz, a critical waterway for oil shipments from the Persian Gulf. Blocking the Strait, through which about 20 percent of the world's oil passes, would trigger a supply crisis. The US has warned such a move would prompt a military response. 

The oil industry sees little chance of war, but it does fear further escalation of the protracted diplomatic standoff between Iran and the West, which could prolong economic uncertainty, cause oil prices to rise, and lead to further instability in the Middle East and oil markets. 

The economic costs stand to be significant at a time when Europe can least afford it – so why is Europe doing this? “The end game in this policy course is not to minimize the price of oil, but to prod Iran into a different policy,” says Harry Tchilinguirian, the head oil market analyst of France's BNP Paribas, one of the world’s biggest banks.

It will 'backfire'

“I don’t know why Europe is going along with this. Europeans have been more balanced than the US, but somehow they have become more emotional. [Joining the embargo] will backfire,” says Iraqi Manouchehr Takin, a senior oil markets analyst with the London-based Center for Global Energy Studies who spent almost a decade in the secretariat of the Organization of the Petroleum Exporting Countries (OPEC). The embargo could end up hurting the EU more than Iran.

“Those who will suffer are refiners in Europe, especially those in countries in financial problems like Italy, Spain, and Greece,” says Dr. Takin. The three buy three quarters of the Iranian crude purchased by the EU and are the ones pushing for a delayed embargo so that they have time to find alternative sources for affordable oil.

The EU was Iran’s biggest client, buying nearly a quarter of its exports between January and October 2011, according to the figures released Wednesday by the IEA. China bought 22 percent and India 12 percent. [Editor's note: This sentence was edited to correctly reflect the date of the IEA figures.]

But oil is fungible, meaning it can be moved around easily and on short notice. In fact, the US and European pressure has already caused changes in oil import-export patterns in the last two quarters. OECD countries have been “aggressively seeking alternative supplies, especially [from] Saudi Arabia,” according to the IEA, and while they still buy more than half of Iran’s oil, Iranian oil shipments are increasingly heading toward non-OECD Asian buyers.

However, OPEC would be simply unable to offset Iranian crude supplies for a long time. Even with Libya’s production increasing and slowing growth in demand for oil as a result of the economic crisis, the realistic global spare oil production capacity is less than 2.9 million barrels per day – 40 percent less than in 2010,  a dangerously small cushion going forward as emerging economies continue to expand and the developed world returns to growth. 

Embargo support losing steam

Outside the EU, support for the embargo is waning. Japan backtracked on its early support, with Prime Minister Yoshihiko Noda overruling the finance minister, who initially said Japan would cut imports.

“We do understand that we need to maintain sanctions, but they must be carried out effectively,” said Foreign Minister Koichiro Gemba. “What's going to happen if oil prices surge is that sanctions will not be effective,” Gemba said. The higher oil prices get, the more money Iran has, while having “an adverse effect not only on the Japanese economy but also the entire global economy.”

India and China – which import 12 percent and 22 percent of Iranian oil respectively – have also balked at an embargo for unrelated contractual differences.

If the EU decision is not backed by other major importers of Iranian oil – Japan, China, India, and South Korea – it will cause only a temporary disturbance while Iran finds new buyers for the oil that previously went to Europe, says Mr. Tchilinguirian.

“If you add other major importers than the opportunity for alternative oil grows scarce, at which point available supply is not sufficient,” he said. 

Furthermore, a partial embargo also helps other US antagonists with oil supplies, such as Russia and Venezuela. Global prices have already climbed more than $10 a barrel since the EU first signaled its intentions late last year and the IEA and analysts concur that prices will continue climbing  because of the Iran standoff.

“Iran might lose part of its customers for a few months until it adjusts, but higher prices will compensate,” Dr. Takin said.

Get daily or weekly updates from CSMonitor.com delivered to your inbox. Sign up today.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Europeans fear Iran oil embargo will wreck economy
Read this article in
https://www.csmonitor.com/World/Europe/2012/0119/Europeans-fear-Iran-oil-embargo-will-wreck-economy
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe