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Europeans fear Iran oil embargo will wreck economy

With a proposed embargo on Iranian oil, the European Union and the US could suffer from rising oil prices while Iran simply finds new buyers.

By Correspondent / January 19, 2012

In this 2008 photo Iranian oil technician Majid Afshari checks the oil separator facilities in Azadegan oil field, near Ahvaz, Iran.

Vahid Salemi/AP/File

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Madrid

The European Union is poised to ban Iranian oil imports, even as critics warn the move could bring deep economic pain to the continent while doing little to change the course of the Iranian nuclear program.

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Iran is playing a game of political chicken with the EU and US. Iran loses if it can't sell its oil.  But its leaders are calculating that the tight oil market and a weak global economy will prevent the West from being able to persuade others to join their embargo, allowing Iran to simply find new customers. The outcome is completely uncertain, but it will have a substantial impact on the global economic recovery.

On Jan. 23, The EU's foreign ministers are expected to officially approve an embargo on Iranian oil after agreeing in principle to the move earlier this month. They'll likely agree to enforce the import ban from July, in order to give countries time to make alternate import arrangements – a middle ground between the three months delay that some want and the 12 months others prefer. The more Iranian oil each EU member relies on, the less enthusiastic they are about quick implementation, say EU and Spanish officials and the International Energy Agency, which advises OECD countries on energy issues. 

EU leaders have gradually warmed to the idea of targeting Iran’s oil industry – which contributes about half of the Islamic Republic’s budget – in hopes of compelling its leaders to forgo uranium enrichment that could eventually be used to develop nuclear weapons. So far, Iranian leaders have only grown more defiant in response to more pressure. 

The oil embargo is just one facet of a complex game and passionate tit-for-tat threats from Iran and the US, Europe, and Israel that will have a dramatic impact on global supply lines. Iran recently threatened to close the Strait of Hormuz, a critical waterway for oil shipments from the Persian Gulf. Blocking the Strait, through which about 20 percent of the world's oil passes, would trigger a supply crisis. The US has warned such a move would prompt a military response. 

The oil industry sees little chance of war, but it does fear further escalation of the protracted diplomatic standoff between Iran and the West, which could prolong economic uncertainty, cause oil prices to rise, and lead to further instability in the Middle East and oil markets. 

The economic costs stand to be significant at a time when Europe can least afford it – so why is Europe doing this? “The end game in this policy course is not to minimize the price of oil, but to prod Iran into a different policy,” says Harry Tchilinguirian, the head oil market analyst of France's BNP Paribas, one of the world’s biggest banks.

It will 'backfire'

“I don’t know why Europe is going along with this. Europeans have been more balanced than the US, but somehow they have become more emotional. [Joining the embargo] will backfire,” says Iraqi Manouchehr Takin, a senior oil markets analyst with the London-based Center for Global Energy Studies who spent almost a decade in the secretariat of the Organization of the Petroleum Exporting Countries (OPEC). The embargo could end up hurting the EU more than Iran.

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