Iran to Europe: Want oil? Meet these demands.

In response to a European Union embargo on Iranian oil scheduled to into effect in July, Iran has threatened to unilaterally cut off its oil exports to six European nations. But while many observers see the move as a toothless bluff aimed at pushing oil prices upward, the prospect of uncertainty could prove disastrous for fragile European and global economies. 

Despite an onslaught of bad economic news in Europe that is reducing global oil demand, prices spiked for a few hours Wednesday to their highest level in more than six months after Iranian state media erroneously published that crude supplies had already been cut to Italy, Spain, Greece, Portugal, France, and The Netherlands.

Prices dropped soon after the Iranian government clarified that it had simply notified diplomats of those European countries that it was setting new – and unacceptable, in European eyes – conditions to continue selling them oil, including disregarding the embargo that EU countries agreed to in January.

“It doesn’t make sense,” says Harry Tchilinguirian, senior oil market analyst in BNP Parisbas, a French bank. “They are going to stop selling oil to countries that agreed not to buy. It’s the same thing.”

But the market’s reaction illustrates the risks involved in the US and European decision to strain Iran's economy with an oil embargo over its current nuclear program, analysts say. Iran stands to lose less at this juncture because there are others willing to buy its oil and it can still deliver a big punch through oil prices.

Iran is demanding that EU countries relinquish the contractual right to stop payments in case of "cause major" like a war, asking for additional payment guarantees, and eliminating short-term oil supply contracts, Spanish Foreign Minister José Manuel García Margallo said in audio statement released Thursday by the ministry. He didn’t offer details.

Spain said that it has already secured alternative supplies, mainly from Saudi Arabia and Iraq, echoing similar calls for calm throughout Europe. 

“If they were to cut it off earlier, we would accommodate quicker, that's what we'd do,” EU Trade Commissioner Karel De Gucht said Wednesday in Hong Kong after a trip to Beijing.

The market will adjust

Furthermore, from a technical point of view, in the unlikely event Iran actually decided to cut supplies unilaterally, it would take it as much as two months to implement – and even then, only if it had alternative buyers lined up.

Timing is critical, Mr. Tchilinguirian says. "In effect you have a window of one or even two months before it would hit oil supplies.”

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