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Iran’s economy runs on oil. On paper, at least, Iran would appear to be highly vulnerable to sanctions targeted at its oil export business.
Iran is the second largest oil producer in the Organization of Petroleum Exporting Countries (“OPEC”), and the fourth largest crude oil exporter. Iran has a 2.2 million barrel-a-day export business. It earned $56 billion in the first seven months of 2011, according to U.S. Energy Department estimates.
According to the Heritage Foundation, Iran’s oil export revenues provide about 85 percent of its government finance. Thus, aiming economic sanctions directly at Iran’s oil exports could land a serious blow to the Iranian regime’s sources of funding for its nuclear enrichment and missile programs.
The question is whether such sanctions are likely to be broad-based enough in terms of participants and happen in time to have the desired impact of crippling Iran’s nuclear ambitions, without causing a massive blowback to the global economy.
Nothing meaningful can be expected from the UN Security Council, where Russia and China will veto any further ramp up in sanctions beyond the four ineffective rounds of sanctions against Iran approved by the Security Council between 2006 and 2010. Thus, only bilateral and regional sanctions are possible.
U.S. sanctions already prohibit virtually all trade with Iran, except for limited activities “intended to benefit the Iranian people” such as humanitarian aid. The U.S. has just recently expanded its sanctions to include companies that help Iran’s oil and petrochemical industries. However, this will have only indirect effects, assuming that Iran does not find ways to evade the sanctions as it has done before. Since the United States imports no oil from Iran, and has not done so for some time, future American oil purchase decisions will have no direct market effect on Iran’s oil revenues.
The main leverage that the U.S. has is a blunt financial instrument – a cut-off of any firms doing business with Iran’s central bank. Iran conducts its vast oil export business through its central bank, linking its national oil company with its oil customers. If the United States were to follow Britain’s example and take steps to isolate Iran’s central bank from the global financial markets by imposing sanctions on any company or government that deals with the central bank, Iran’s ability to get paid for its oil would be severely hampered. So far, however, the Obama administration has not gone that far because it fears disruptions to the global oil market, causing prices to spike at a time when the global economy is already sputtering.
Assuming the Obama administration continues to dither on cutting off Iran’s central bank, the only way to hurt Iran’s oil trade short of military action is through the decisions of Iran’s major oil customers to look elsewhere for oil.
Don’t hold your breath waiting for any bold decisions to cut off current purchases of Iranian oil, however. So far, it’s virtually all talk and no action.
The European Union governments agreed on December 1st to examine sanctions against Iran’s energy sector. However, no decision is likely until sometime in January.
According to Reuters, EU members take 450,000 barrels per day of Iranian oil, which accounts for about 18 percent of Iran’s exports.
“We need a common position of all European Union member states,” Energy Commissioner Guenther Oettinger told Reuters when asked about a possible ban.
France, Britain, and Germany are among the EU countries that are reported to be favorably disposed to the idea of a ban. However, other EU members are balking, including – no surprise – Italy and Greece. Italy, in fact, was the largest oil importer from Iran in Europe last year, purchasing 10 percent of Iran’s exports. Perhaps Italy’s dependence on Iranian oil will decrease once Libyan oil comes back on line, but Italy’s economy is too fragile at the present time to risk losing any important source of energy.
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