The EU’s oil embargo on Iran that came into effect on 1 July is likely to do as much damage to the European Union as it is to Iran and the imposition of these suicidal sanctions is more about Israel than Iran.
Had Israel taken a break from its saber-rattling, the EU sanctions would likely have been postponed during the third and latest round of nuclear talks that took place in Moscow in late June. This would have (and should have) been on the table. But Western leaders are still concerned about Israel and the last thing President Barack Obama wants right now is for the loose Israeli cannon to go off before the November elections.
The 1 July EU oil embargo on Iran coincides with a new set of US sanctions punishing those cutting oil deals through Iran’s central bank, as well as a European ban on shipping insurance for tankers carrying Iranian oil.
Iranian oil exports have dropped around 20%. Europe is Iran’s fifth largest customer and new sanctions will, on paper, amount to a loss of around a million barrels a day. However, the sanctions have been more successful largely because of the economic crisis that has seen the price of oil fall even in the face of reduced supply from Iran.
At the same time, Iran is not desperate. Even once the EU oil embargo begins to show its teeth and if that results in a 50% reduction in Iranian oil exports, as predicted, Iran still has serious oil revenues to fall back on.
The sanctions are also less hard-hitting than they would have been had China played along. In fact, this is a perfect opportunity for China to step in and score itself a few lucrative Iranian energy projects that no one else is “allowed” to take.
As Peter Lee notes in the Asia Times, “the bottom line is that, by necessity, two way Sino-Iranian trade and integration between the two economies has exploded with the cut-off of Iran from the West and forcing Iran to denominate its trade in yuan will simply accelerate this trend.”
On the domestic front, there are grumblings that the Iranian Revolutionary Guards Corps (IRGC) is behind on payments to its personnel, for which they blame the government (via the media). There is a great deal of politics behind statements like this. Supreme Leader Ayatollah Khamenei controls the Guards, while President Mahmoud Ahmadinejad is the head of the government. Situations like these are often best viewed as part of the on-going power struggle between Khamenei and Ahmadinejad—a struggle the latter is losing.
What effect will the sanctions have on Europe? Certainly Italy, Greece and Spain—the latter two in particularly dire straits—are bemoaning the sanctions as they rely heavily on Iranian imports, though some of the pain was already being offset by low oil prices.
Greece will feel the oil embargo the most. In an interview with Deutsche Welle, oil expert Volker Blandow noted that Greece “had contracts with Iran which had decoupled delivery and payment. This meant that Greece received oil on credit, and could pay for it later.” Now Greece will have to make advance payments that it can’t afford.
It is a disastrous decision in the middle of a massive debt crisis that is threatening to rip the eurozone apart, but anything to keep Israel from launching a war.
That the price of oil has surged to a one-month high this week is only indirectly a result of the new sanctions on Iran and specifically on speculation that European central banks and the Chinese central bank will ease monetary policy by cutting interest rates to offset reduced supply from Iran.
Directly, however, the EU oil embargo is not expected to result in any immediate jump in oil prices because the plan has been in the works for nearly six months and the frenzy to secure alternative supplies (and the resultant speculation) is already pretty much over.
Of course, Tehran will enjoy a small victory in this rise in oil prices.
By. Jen Alic of Oilprice.com
Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.