Can Europe’s Oil Boycott Really Sink Iran?

The European Union threatened Iran on Monday with cutting off petroleum imports into the 27 EU member states, and announced sanctions on Iranian banks and some port and other companies.

Iran sells 18 percent of its petroleum to Europe, and Greece, Italy and Spain are particularly dependent on it. Europe also sells Iran nearly $12 billion a year in goods, which likely will cease, since there will be no way for Iran to pay for these goods. Some in Europe worry that the muscular anti-Iran policy of the UK, France and Germany in northern Europe will worsen the economic crisis of southern Mediterranean countries such as Greece.

Others think that Iran’s nuclear enrichment program is still primitive and that allegations that Iran is seeking a nuclear warhead are hype.

About 60% of Iran’s petroleum now goes to Asian countries, especially China, India, South Korea and Japan. China and India have no announced plans to reduce purchases of Iranian crude, and South Korea says it will seek an exemption from the US so as to continue to import. Japan says it plans only very slowly to reduce imports from Iran. Iran and India have just reached an agreement whereby some trade with Iran will be in rupees, to sidestep US sanctions. Indian firms are considering whether to fill the $8 billion gap in exports to Iran left by the Western sanctions (many do not want to be cut off from also exporting to the US, as they would be if third party sanctions were applied to them).

Europe’s squeeze on Iran will not take place until June, and there will be a meeting in May to assess the situation (i.e. to make sure Greece won’t be sunk, along with the European economy, by these steps). There is some indication that much of Europe hopes Iran will be more forthcoming on the nuclear issue with Europe by then, so as to forestall these drastic steps.

Although a European boycott of Iranian oil will increase the cost of doing business for Iran, will hurt the Iranian public, and is already harming the value of the Iranian currency, it is highly unlikely to cut Iran off from exporting to the world market or to put so much pressure on the government that it will change its policies.

In order for Iran to find it impossible to sell its petroleum, world supply would have to exceed world demand by roughly 2.5 million barrels a day. That outcome could be produced either by a fall in world demand (typically as a result of a further economic turn-down) or by an increase in world supply (which would require that all current producers continue to export at at least the same rate, and that some of them export much more than they are currently doing).

The Organization of Petroleum Exporting Countries expects world demand for petroleum actually to increase in 2012 by about 1 million barrels a day, up to 89 million b/d over-all. There is probably slightly more demand than supply in the world market, with China and other Asian countries still growing strongly, and the number of cars and trucks driven in Asia increasing rapidly. If Iran’s 2.5 million barrels a day really could be taken off the world market, that would be a total shortfall of 3.5 million barrels a day (if one counts the expected increase in demand), which would cause petroleum prices to skyrocket.

Europe seems to hope that Saudi Arabia will pump an extra 2.5 million barrels a day to keep prices stable if everyone stops buying Iran’s petroleum. But since demand will likely increase this year, Saudi Arabia would have to pump 3.5 million barrels a day to meet the total shortfall. That kind of increased production on a sustained basis is probably beyond Saudi technical capacities, and much of that extra production will likely be “sour” (full of sulfur and other impurities and expensive to refine). Saudi Arabia already is pumping nearly 10 million barrels a day, which is unusually high. That it could do 13.5 million barrels a day is frankly fantastic.

Moreover, there is a lot of evidence that Saudi Arabia does not want to cause prices to fall below $100 a barrel for a while. The kingdom forestalled Arab Spring style protests by much increasing its welfare spending, essentially bribing its population to remain quiet. But to pay for all that extra kindness to its population, it needs its petroleum to sell at historically high prices. If Riyadh increases its production, and Iran continues to find customers around the world for its own petroleum, then the price would fall, creating massive budget shortfalls in Saudi Arabia and making it impossible for the kingdom to follow through on its promises to its people. That course would be, to say the least, dangerous.

Moreover, some current world supplies cannot be counted on. South Sudan is threatening to turn off its spigots to protest high tolls (35%) imposed on its pipeline exports via Sudan proper. There is some danger that the pipes will be ruined if they are not used for a while, so getting that petroleum on line again may be difficult.

Indeed, a lot of oil producers are unstable or face labor actions. Oil workers in Nigeria are threatening to take its 2 million barrels a day of exports off the world market.

Other major producers and exporters face problems of increased domestic consumption, as populations drive more, and of poor management or lack of investment in the sector. Mexico has seen its oil exports fall by 25% since 2004, and may export no petroleum at all in a decade unless there is a lot of new investment in its petroleum industry.

A temporary fall in petroleum prices from time to time is possible, but the US Energy Information Agency expects there to be upward pressure on petroleum prices in the next few years, predicting a price of $120 per barrel by 2016. (This is despite an expected rise in US oil production, which will probably be eaten up by increased US demand as the economy improves).

A secular trend toward higher petroleum prices indicates demand outpacing supply for the foreseeable future, which is exactly the circumstance under which an attempted boycott of Iranian petroleum would fail.

All Europe would be doing is importing petroleum from, say, the United Arab Emirates, which now mainly supplies Japan, and forcing Japan to import instead more Iranian oil– whether Washington likes it or not. It is a shell game, unless world supply exceeds demand by 2.5 million barrels a day for several years, allowing the world to leave Iran’s petroleum in the ground.

Eventually a combination of renewable energy and better automobile batteries may allow the world to fuel automobiles in a less destructive way than via petroleum. But that day is too far off to be relevant to Iran’s progress in closing the nuclear fuel cycle.

Posted in Uncategorized | 9 Responses | Print |

9 Responses

  1. What does the US, Israel and the EU want from Iran? I have read recent articles that indicate IAEA is monitoring Iran’s nuclear labs and that Iran is willing to talk about their nuclear ambitions, but the US, coaxed by the Israeli lobby, will not respond. What is the bottom line? Is the US demanding that Iran cease all nuclear enhancement, even low grade, in order to end the boycott?

    When you look at the current demonazation of Iran, one has to think back to the days and the rhetoric of the pre-Iraq invasion, when the US wouldn’t take YES for an answer.

  2. Hi Juan, reading news from Canada I read the EU decision as no “New” imports, not a cease in imports of Iranian oil. Which is a good headline, but of little to no real consequence in terms of sanctions.

  3. John Robb (of Global Guerrillas / Brave New War, who consults for DoD, CIA, etc.) has a piece up on his new resilient communities site discussing this.

    His conclusions:
    1. Sanctions disconnect the Iranians from the global economy which soften the impact of a war with them.
    2. Sanctions also accelerate societal and economic decay in Iran, making it highly likely that it would start a conflict.

    Bottom line: ‘It will be a global train wreck, and through tight coupling, you will be along for the ride.’

    link to resilientcommunities.com

  4. It strikes me that sanctions of this sort only strengthen the regime since the only financial institution which can continue to exist in such an environment is the central bank, and the only trade which is possible is that permitted and arranged at a governmental level. The Original Iranian Revolution was driven in part by the power of the bazar, independent of the Shah. These sanctions are destroying the chance for any similarly alternative power structures to develop in Iran.

  5. One factor to consider is that Iranian economy has been privatized. Any market pressures would create new winner and losers. The businesses will now go after the new opportunities. The game changes, but game is not over.

    With all the IAEA inspection, espionage activities, even with apparent ease that nuclear scientist are killed in Iran, one has to assume that if there were any real evidence of the nuclear weapons program it would have been all over the news. If there are no nuclear weapon program, then we have to conclude that Europe is willing to sacrifice its own economic interest for some other agenda. That doesn’t speak well for future of democracy, where the government should represent its own people and their interest. Europe Spring around the corner?

  6. Can someone out there please let us know, at your convenience, the last date of an invasion by an armed military force, deployed by IRAN, across the border of a sovereign nation? Please do not include any other sort of incursion, such as the assignment of undercover agents, snoops, etc. Every country does that stuff. thanks, rmdw

  7. As Professor Cole very well documents, the world is right on schedule for Global Peak Oil around 2020. That is when the total global production of oil will be on the down-hill slope of the Hubbard Curve.

    In other words, Iran has checkmated the US and Israel.

    Over the next year it will become increasingly obvious the US has zero power to do anything about Iran and Israel will become increasingly paranoid.

    As Professor Cole notes, the Saudis have zero ability to produce any more oil. In fact, all the production data for the last five years indicates that the Saudis are past their peak production and from this point forward their production will NOT increase, but will actually decline just like every other production area has, following the Hubbard curve.

    Things are going to become very unstable.

  8. Obama also is willing to see sky-high gas prices and more US war deaths in order to please Israeli hardliners and neo-cons. He’s sacrificing our national interest for some agenda I don’t understand. A war with Iran will have many bad consequences, including an increase in anti-Semitism.

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