Europe and Iran Oil Sanctions

Friday, January 13, 2012

Hamid Reza Shokouhi

Member countries of the European Union (EU) have reportedly reached an agreement to impose sanctions on Iran's oil sector. After the agreement enters into force, the European countries will stop buying oil from Iran. Media reports are, of course, contradictory and this proves that EU member states have not achieved a final agreement yet. However, what if they reached an agreement? Will that agreement be actually enter into force? The following points should be taken into account before answering this question.

1. A large part of Iran's oil exports are destined for non-European countries and oil sales to the EU members have declined in past years. Of course, it would be oversimplification to assert that cutting Iran's oil exports to Europe will cause no problem for the country. It would mean the loss of active customers. However, even in case of agreement over sanctions, it will take time before they actually enter into force. The oil consignments are sold on the basis of long-term contracts in international oil market. Therefore, it is not possible for buyers and sellers to decide to stop buying or selling oil as of tomorrow. As a result, even if sanctions are enforced, it will take time before the impact is felt in Iran.

2. The most important European customers of Iran's oil – except for Turkey which is not a member of EU yet – include exactly the same countries which are entangled in a severe economic crisis now. Spain, Italy, and Greece, import 13-14 percent of their needed oil from Iran. Meanwhile, they are experiencing a more severe form of the ongoing economic crisis compared to other European states. Therefore, it seems that Iran oil sanctions actually exist only on paper and will not be enforced in any near future. It is not yet clear how these three European states, which are grappling with more serious economic problems compared to other EU members, are going to meet their energy demands under the present dire conditions if Iran's oil sanctions are enforced. It is not also known from what alternative source the other EU members are going to supply needed oil to replace it for Iran's crude?

3. It will not be easy for the European countries to find a substitute for the oil that they have traditionally bought from Iran because this would require other oil producing countries to increase crude output. As said before, oil is usually traded between buying and selling countries under long-term contracts and it is not easy to find another supply source over a short period of time. Just in the same way, it is not easy to find new customers for a country’s oil as well. Under these conditions, in case Iran oil sanctions are implemented, European countries will be able to ignore Iran's oil only if another country immediately starts producing surplus oil to make up for the shortage of Iran's crude in the market. A country like Iraq is obviously unable to do this.

Despite intense activities to develop its oil fields, Iraq has not been able to start production from many of those fields yet. Out of all member states of the Organization of Petroleum Exporting Countries (OPEC), only Saudi Arabia has enough potential to compensate for the absence of Iran's oil in Europe. But will Riyadh mobilize its surplus capacity to replace Iran's oil? Two developments make this very improbable.

Firstly, during the recent OPEC meeting which was chaired by Iran, the most important feature was an atmosphere of friendship and congeniality between Iran and Saudi Arabia. Following the meeting, the Saudi oil minister clearly rejected that his country will replace Iran's oil in the market. Of course, past experience has shown that Saudi Arabia supports the West more than Iran. The last OPEC meeting in 2011 whose chairman was Iran's oil minister, led to more proximity between Iran's positions and those of Saudi Arabia with the Saudi oil minister, Ali al-Naimi, admiring Iran's chairmanship of the meeting. During that meeting, Iran did not oppose Saudi Arabia’s proposal to increase the organization’s output ceiling to 30 million barrels per day in order to appease Riyadh. This is the second point which can be used to refute the claim that Saudi Arabia will replace Iran's oil. The increase in OPEC’s daily output required a large part of Saudi Arabia’s surplus capacity. Therefore, Europe cannot count much on Saudi Arabia’s surplus oil to compensate shortage of Iran's oil in the market. However, the double part usually played by Russia should not be ignored here. Russia has huge oil reserves and has never been a trustworthy partner for Iran.

On the whole, it seems that Iran oil sanctions only exist on the paper and will not enter into force in foreseeable future. Two points, however, should be born in mind. Firstly, by following suit with the United States in imposing oil sanctions on Iran, Europe has proven that it is quite serious about accompanying the latest round of anti-Iranian pressures by the United States which also includes sanctions against Iran’s Central Bank. This clearly proves how critical conditions are currently facing Iran, which call for much more diplomatic tact on the part of Tehran. The second point is that when sanctions against Iran's Central Bank are enforced, the country will have to face serious challenges and obstacles for financial exchanges with countries buying its oil. As a result, Iran's oil customers will gradually try to find other sellers in order to supply their needed oil with more ease. In the long run, this may help the West achieve its goals with regard to Iran. It seems that the best solution under present circumstances is for the Iranian Oil Ministry officials to try to keep international oil market calm. To do this, they should emphasize on the importance that Iran attaches to observing the principle of justice in supplying oil to all countries needing it regardless of political issues which may exist among countries. Iran's oil minister as well as the managing director of the National Iranian Oil Company have shown due attention to this point in the past few weeks. Another solution which needs attention from Iran's political and military officials is that they should prevent the West from achieving its goal for fostering more tension in the region. In doing so, they intend to use regional tension as a means of putting more pressure on Iran. Iran's oil sanctions will not be harmful in the short run. However, in the long run and in the absence of correct management of the situation by Iran, they may start to show their impact on the country in various political, economic and military areas.

Source: Mardomsalari Newspaper
Translated By: Iran Review

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