Role of Iran Oil Sanctions in Threatening International Energy Security

Tuesday, February 5, 2013

A Study Based on Amineh and Houweling Model

Maryam Pashang

International sanctions against Iran's oil sector have slowed down development of energy resources in Iran, on the one hand, while making it more difficult for customers of the country’s oil to access Iran's energy reserves, on the other hand.

Now, the question is what impact can international sanctions against the Iranian oil sector have on global energy security? According to “resource scarcity model” of Amineh and Houweling, due to its huge oil and natural gas reserves, Iran is an important player in international energy markets. Therefore, imposing sanctions against Iran's energy sector can pose a serious threat to global energy security.

Economic sanctions are usually imposed in order to help the sanctioning party achieve certain political goals. Therefore, economic sanctions are usually a means of following up on a country’s foreign policy goals. In fact, the main objective of economic war against a country is to do as much damage to economic activities of the country under sanctions as possible. As a result, sanctions imposed on Iran's oil sector also pursue a political goal which is to change the behavior of the Islamic Republic of Iran.

However, it seems that imposing oil sanctions against a major player in global oil markets like Iran will pose a serious threat to the security of energy flow for all market players on both the supply and demand sides of the equation. This is even truer in view of the increasingly intertwined nature of international oil and gas markets as a result of economic globalization, as well as the non-renewable nature and scarcity of fossil fuel reserves in addition to concentration of these reserves in insecure regions of the world such as the Middle East and North Africa. By taking advantage of the resource scarcity model of Amineh and Houweling, one can easily prove that any disruption in energy supply and demand cycle can challenge the security of energy flow throughout the whole world.

According to Amineh and Houweling model, the need to increase global energy security index is being felt more urgently as energy resources become increasingly scarcer across the globe. Oil producer and consumer countries find themselves in global markets where oil trade should be carried out according to the balance between supply and demand and on the basis of a fair price. Therefore, oil producer and consumer countries engage in oil trade on the basis of their respective countries’ oil strategies within framework of bilateral relations. The existing international environment paves the way for growing interactions at transnational level among various and numerous players and social forces.

Based on Amineh and Houweling model, the interactions between energy producer and consumer countries as well as interactions among all national and transnational players involved in this issue are carried out within framework of a special geopolitical context. In this model, the scarcity of energy resources is divided into three categories: demand-based scarcity, supply-based scarcity, and structural scarcity.

In the first state, namely demand-based scarcity, three factors are actually studied. The population growth is the first of those factors. According to figures released by the United Nations, developed countries will experience depressed growth of their populations in this century and, in some cases, their population growth rate will get close to zero. In the meantime, the population of less developed countries will exceed 8 billion by 2050 causing them to account for about 86 percent of total world population. Most of this population will live in countries with low per capita income where economy is very vulnerable and human development indices are quite low.

The second factor is growth in per capita income, which will lead to increased consumption and imports. Dividing the gross domestic product (GDP) on the total population is one method for measuring per capita income in any given country. In this scenario and according to economic outlook depicted for the member states of the Organization for Economic Cooperation and Development (OECD) in 2012, the real growth figure for the GDP of OECD member states will stand at 2 percent by 2050. At the same time, the corresponding rate for countries outside the OECD will fall from 7.8 percent in a decade before to 4-6 percent in 2020 and 2-3 percent in 2040. The highest growth figure will pertain to developing countries.

The third factor is development of technology which leads to increased consumption and imports. On the one hand, development of technology related to oil and gas industry will lead to increased production from conventional and nonconventional fossil fuel resources as well as increased productivity in production and consumption of energy. On the other hand, development of technology in other sectors such as agriculture, industries, housing and others will lead to increased consumption and, consequently, increased demand for energy.

In the interval between 2010 and 2030, the primary rate of energy consumption will stand at 1.6 percent. Economic growth in non-OECD countries will lead to a parallel rise in energy consumption in those countries. Total energy consumption in non-OECD countries in 2030 will increase 69 percent compared to 2010 with an average growth rate of 2.7 percent. The figure will account for 65 percent of total energy consumption in the world which would be comparable to 54 percent of energy consumption in 2010. The energy consumption in member states of the OECD will remain almost unchanged, but there will be considerable change in composition of the energy basket. Renewable energies will gradually supplant oil and its derivatives in transportation while natural gas and coal will be of more use to power generation. This change in composition of energy basket will take place for such reasons as fuel price, technological innovations and suitable policymaking.

Increased consumption and demand will be accompanied with increased import of energy by consumer countries. As a result, share of public expenses related to oil imports increases in these countries. At the same time, growth in production and supply of crude oil has been dwindling in many parts of the world and has been at a standstill in other parts.

This issue will give birth to another problem in the form of “scarcity of supply.” Oil prices have their roots in the interaction between energy supply and demand in global oil market and scarcity of supply will finally leave its mark on energy demand. Due to presence of such forces in the market, countries consuming crude oil are heavily dependent on oil imports. As a result, they try to influence producer countries by controlling energy reserves or oil-rich regions of the world. The member states of the Organization of Petroleum Exporting Countries (OPEC) will account for 70 percent of crude oil supply growth and their share in global markets will hit about 45 percent. Total crude oil production by the OPEC member states will increase to about 12 million barrels per day while the output of gas liquids will hit about 4 million barrels per day. Non-OPEC production will also increase by 5 million barrels per day because increased output of some new fields will make up for production fall in older fields.

As a result of the above trend, “structural scarcity” will follow which is more focused on the supply side of the equation. OPEC’s activities aimed at exerting physical control over the markets with the final goal of controlling oil prices can be considered along the same lines.

Based on the above facts, the rate of growth in the supply of crude oil has not matched the rate of growth in the demand. Therefore, if technological breakthroughs are not made to help with the management of energy supply and demand, and development of substitute energy sources does not take place as projected, energy scarcity will lead to a great leap in the oil prices and its negative consequences for the world’s economic growth. However, even if optimistic projections about the growth in the supply of conventional and nonconventional forms of fossil fuel as well as increased supply of renewable energies are realized, any subsequent disruption in energy supply and demand, especially on the side of supply, will pose a great threat to global energy security.

Apart from energy supply and demand equation which has profound geopolitical implications and can change the course of countries’ policies and foreign relations, the revival of nationalistic sentiments revolved around energy resources and resurgence of mercantilism in the form of energy resource mercantilism can be a threat to global energy security under the present circumstances. These issues continue to affect security of energy for oil and gas exporting countries in the Middle East and North Africa more than any time before and can have a serious effect on the components of energy security. As a result, they can also seriously influence the national security of energy consumer countries.

Scarcity of energy is a result of mismatch between energy supply and demand. In the meantime, special policies adopted by influential players in energy markets and, on the whole, influential players in various phases of energy cycle (supply, demand, transit, and technology) also play a major role. Since fossil fuel resources are not renewable and they continue to be the most important energy resources for the projected period, any disruption in global supply of crude oil as a result of such natural disasters as monsoon storms, earthquakes, floods, wars, and sanctions, especially against major oil producing countries, can pose serious challenge to global energy security.

In view of Iran's huge oil and gas resources, the country ranks among major players in supplying energy to the world both at the present and in the future, and can meet a large part of global demand for crude oil and natural gas. Therefore, politically motivated sanctions against this country can certainly slow down development of domestic oil industry and subsequent production of crude oil. This issue will not only leave its negative mark on the country’s energy economy and security, but as a result of limitations pointed out in Amineh and Houweling model, will also pose serious threat to security of energy across the globe.

Oil sanctions have slowed down the pace of developing Iran's energy resources, on the one hand, while making it more difficult for the country’s customers to access its rich energy resources, on the other hand. Of course, as a result of the globalization of the economy and distribution of oil demand markets across the world and, in other words, due to a shift in geographical factors of energy supply and demand from the United States and Europe to Asia and the Middle East, economic sanctions, especially against oil industry are no more as efficient as what they once were and are more suitable for exerting psychological, rather than economic pressure on nations. However, according to the aforesaid model and since security of energy supply and demand are two flip sides of a coin, these sanctions can not only tamper with security of demand for Iran's energy resources, but also negatively affect security of energy supply to its customers.

*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.

Key Words: Iran Oil Sanctions, International Energy Security, Amineh and Houweling Model, Pashang

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

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