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Let’s face it. Europe has its hands full. The European Union is trying these days to move towards more integration on a host of issues, not the least of which is solving its present economic mess. Considering the precarious economic state the members of the European Union are grappling with these days, many EU members facing domestic pressures at home are not likely to make a concerted decision to cut off oil purchases from Iran that may well cause them more economic pain in the short run than it will Iran.
Most of Iran’s oil exports go to Asia. Two-thirds of its oil exports are shipped to China, India, Japan and South Korea. Without their full participation in banning purchases of oil from Iran, oil sanctions will not mean very much. And China will likely increase its purchases in the face of any sanctions imposed by other countries, counteracting any effect on Iran such sanctions might have had.
Indeed, China alone accounted for 22 percent of Iran’s export volumes during the first half of this year, Bloomberg reports. That figure is larger than the entire EU’s share of Iran’s oil exports and will likely increase if European or other countries cut back on their purchases. China will not only be motivated to increase its imports from Iran for political reasons, in an effort to counter the West and move closer to Iran. According to Robert McNally, president of the Rapidan Group, a Washington-based energy analysis firm, China and other Asian countries will benefit from the discounts that Iran is expected to offer. Lower prices can be expected to result in a higher volume of purchases.
“The Iranians would have to accept a lower price for their crudes, because they’d have to dump it into Asia. They would have to compete more aggressively to sell what they would be selling in Europe elsewhere,” said McNally.
Mark Dubowitz, executive director of the Foundation for the Defense of Democracies, a national security think tank, said their modeling “shows that if only China was purchasing Iranian oil, they would be able to drive for discounts of about 39 percent on every barrel of Iranian oil.”
Iran’s revenue stream would most likely go down in such circumstances, but not to any catastrophic degree. Meanwhile, China would receive a huge windfall that would further advance its competitive position.
Japan and India have accounted for the purchases of 14 percent and 13 percent of Iran’s oil respectively.
Japan signed a contract with the National Iranian Oil Company for the purchase of oil through at least 2012. It is unlikely to participate in an outright ban on the purchase of oil from Iran.
“Iran represents roughly 10% of Japan’s crude imports,” said a spokesperson for Japan’s Ministry of Foreign Affairs recently. “We need to be very careful in making such a decision, given that our priority is securing energy supply in the aftermath of the massive earthquake in last March,” he added.
India’s central bank has taken steps already to cut the flow of oil money to Iran by blocking payments, although some Iranian crude oil is still finding its way to customers in India.
South Korea, the world’s fifth largest crude oil importer, is not planning a ban on crude oil imports from Iran, but is considering a ban on Iranian petrochemical product imports, according to sources in Korea’s economic ministry quoted by the Brunei Times.
In sum, oil sanctions alone are not likely to be effective because they will be a patchwork at best. And they may have the unintended consequence of helping China, which will probably end up paying less for Iranian oil because of discounts. Iran will suffer some economic consequences but not enough to offset the negative effect on the global oil market unless Saudi Arabia, and possibly Libya and Iraq, are able to quickly make up the difference. Then again, other oil-exporting countries, unfriendly to the United States, such as Venezuela and Russia, will very likely seek to profit from the purchase vacuum created by the sanctions.
The only real economic sanction that can bring the Iranian regime to its knees is to cut off its central bank from the world financial markets. Britain has shown the way. But President Obama has to lead closer to the front this time, not from behind.
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