Oil Sanctions against Iran or A Threat against Global Energy Security?

Saturday, February 11, 2012

Maryam Pashang

Enforcing sanctions against Iran's oil imports by the European Union will pose a serious threat to global economy and energy security. The main goal of the sanctions is to bring about a basic change in Iran's nuclear program and keep the balance of regional power by using such means as threat of force or sanctions. However, given the growing trend of economic globalization and increased interdependence between energy producers and consumers, and due to emergence of new effective actors in political and economic equations of the world, the entire globe is now experiencing a new paradigm. As a result, solutions sought to political challenges in the 20th century are no more efficient to tackle challenges in the 21st century.

Imposing economic sanctions against Iran to achieve political goals and keep the balance of power in the Persian Gulf region has been used as a means of putting pressure on Iran since the victory of the Islamic Revolution in 1978. This is, however, the third time in the past 150 years that Iran's oil industry has come under international sanctions. The first sanction on buying Iran's crude was imposed by the British Petroleum Company after nationalization of the Iranian oil industry was announced. The second oil embargo was enforced in early years following the Islamic Revolution when the United States imposed sanctions on buying Iran's oil. In both cases, Iran was able to find new markets for its oil in a short period of time and sanctions did not have a powerful effect on the country’s economic trends, though they caused price fluctuations in international markets.

Recent sanctions imposed by the European Union which ban buying Iran's oil, have been announced under conditions when a different paradigm compared to the 20th century governs the world’s political and economic conditions. Relentless economic development in developing countries of Asia and their emergence as new and powerful players in political and economic equations of the world as well as increased interdependence among producing and consuming countries which is pivoted around energy, but also encompasses other economic, political and security spheres, and finally, more complex conditions of global oil markets compared to the past, have rendered such methods as sanctions and threat to force totally useless for solving political challenges and disputes. In other words, energy demand in global markets is not solely controlled by big economic powers like the United States and the European Union and other big markets such as the Asian ones can also ensure demand security for major producers of crude oil.

Another important point is the existing untoward economic conditions in the world, especially Europe’s debt crisis which, despite extensive efforts, no long-term solution has been found for it and solutions proposed so far have simply had short-term effects. As a result, more increase in oil price due to any disruption in supply by producing countries can have very negative consequences on economic growth of these countries.

In addition, the European Union has considered a six-month period before sanctions become fully operational. In reaction to this measure, Iran's Majlis deputies have proposed a plan to impose immediate sanctions on oil exports to Europe. If the plan is passed by the Iranian parliament and given economic conditions in Europe and absence of suitable alternatives to Iran's oil, international crude prices will shot up to their highest level ever.

The existing conditions in the oil markets also put upward pressure on prices. Never has the oil market been so affected by geopolitical tensions. In addition, concerns about spillover of the Arab Spring to such major oil producers as Saudi Arabia, increased tension and conflict in Nigeria and Sudan, as well as international sanctions against Iran will further increase psychological pressure on the oil markets.

Moreover, oil markets are experiencing a situation which is technically known as “contango.” This means that present prices are assessed to be lower than future prices. Under such conditions, refiners start storing oil. In this way, while availing themselves of the difference between the present low and future high prices, they would be able to cover the costs of storage. The contango conditions that currently exist in the markets are somehow different from the past because the situation has been further complicated by a combination of financial problems and budget deficit.

Although crude supply and demand is currently in a state of balance, the surplus production capacity in international markets is limited and further disruption in crude supply, even when offset through strategic stores or reduced demand as a result of global recession, will increase existing psychological pressures in the market and push prices up.

There are also serious doubts about the real surplus production capacity in major OPEC and non-OPEC producing countries which add to the existing concerns. According to the latest reports, Saudi Arabia’s surplus production capacity has been announced above the real figure. Even if the alleged 2 million barrels per day of surplus capacity is taken to be true, it consists of heavy and sour varieties of crude oil whose production cannot continue for a long time beyond, at most, three months.

Apart from economic issues and interdependence among energy markets, imposing sanctions against a major producer of crude oil like Iran, in view of the country’s superb geopolitical situation in the Persian Gulf and its command over the strategic Strait of Hormuz through which 40 percent (14-16 million barrels per day) of the world’s crude transit passes, will automatically raise security concerns in the region and led to militarization of the situation even if Iran has no serious plans to close the Strait of Hormuz. Such concerns will increase political and economic costs of establishing security in the region, on the one hand, while increasing possibility of a conflict between the two sides, on the other hand. Neither of these situations will be beneficial to regional countries.

In fact, oil markets are very complicated markets where any manipulation of basic factors, when it affects either supply or demand, will pose serious threat to all players in the markets, including producers and consumers. In fact, security of supply and security of demand are two flip sides of a coin which cannot be imagined independently.

In a world where interdependence between energy producers and consumers is constantly on the rise and under conditions when globalization of economy has introduced a new paradigm to political and economic equations of the world and has introduced new players in international arenas, sanctions and threat to use of force are no more effective. In addition, phasing out Iran as a big regional power and a major producer of energy, which plays a decisive role in supplying global energy and ensuring energy security, will be by no means possible.

*Maryam Pashang is a Visiting Research Fellow at the Institute for Middle East Strategic Studies, and a Ph.D. candidate of international relations at the Islamic Azad university, Science and Research Branch.

Source: Institute for Middle East Strategic Studies (MERC)
Translated By: Iran Review

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