Oil Sanctions In Store for Iran?

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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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  • StephenD

    “President Obama has to lead closer to the front this time, not from behind.”

    I didn’t know FPM was into joke telling.

    “…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.”

    Tell us again why we aren’t aggressively drilling here in America. We could possibly accommodate other nations for the time it would take to overthrow such regimes as Iran. Even if it is too late for this “go around” there is the future to consider. At least we could assure our own survival with independent, domestic energy.

    DRILL BABY DRILL!

    • Joseph Klein

      You are completely right about the drilling. The Keystone Pipeline should also have been approved by now.

  • joy52

    We should become energy independent and disrupt their ability to harm us in whatever way, by whatever means. Next, we help our friends.

  • mrbean

    Yes we will show Iran by putting them on triple-double probation now just like we di to Bluto and his Delta-Delta-Delta crowd. OOooooh,,,, they will fear us! Oh give me a break! Only another harvard mother's boy would swallow this wad.

    • StephenD

      LOL, this is funny. Animal house! You’re right though. Sanctions won't do it. With a Zealot that believes it is his "Destiny" to usher in the 12th Imam for the final Caliphate and wishes to have the streets run with blood, costing him money isn't enough. But as the author said "short of military action…."
      So, unless this regime is taken out, but whatever means, the best we can do for ourselves (and our friends), I think, is become energy independent.

  • ObamaYoMoma

    With respect to Iran, no sanctions will stop them from acquiring nukes. The only thing that will stop them from getting nukes is brute military force.

    Not to mention that if Iran get nukes, the Saudi financed nuclear weapons arsenal sitting in Pakistan will quickly be proliferated to the Sunni Islamic world in response to Iran's acquisition of nukes with impunity. Thus, the Islamic world with its imperative to make Islam supreme will become armed to the teeth with nuclear weapons, and an Islamic world armed to the teeth with nuclear weapons will inevitably become far more belligerent and aggressive. Hence, if you believe that oil prices are sky high today, just wait to see how much higher oil prices will sky rocket should the Islamic world become armed to the teeth with nuclear weapons.

    Too bad the incredibly inept Bush administration was too incompetent to eradicate the Iranian ruling Mullahs and their nuclear weapons program before things got so way out of hand, because the price of doing so today will be exponentially far more expensive and painful. Those who call for using military power only as a last resort, with all due disrespect, are totally incompetent and mentally handicapped appeasers!

  • WilliamJamesWard

    Maybe the Sunis and Shias will obliterate themselves in a nuclear firestorm,
    now wouldn't that be a shame. Consider how our own government has spent
    trillions of dollars on imported oil, oil we could have produced and the money
    kept in America. If Iran is a threat, Washington is equally odious………..Oil
    sanctions no, air sanction seems just right……………………..William

  • BS77

    Intimidated by that little vermin from Tehran? Unbelievable. It's like the big woman jumping on the chair when she sees a mouse.

  • steven l

    China and Russia do not care if Iran goes nuke. Big US oil companies don' t care if Iran acquires nukes. They are far away. Iran won't dare use the nukes but if any of their acolytes use it they will be the first to get nuked massively