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EU boycotts Iranian oil

July 1, 2012

Beginning July 1, the European Union ceased buying Iranian oil. Brussels hopes the move will force Iran to the negotiating table over its controversial nuclear program. Will this strategy work?

Worker at Iran Oil refinery
Image: psyop.ir

The EU has upped the ante in the ongoing confrontation with Iran. Iranian oil tankers will only be allowed to dock in European ports again when Tehran enters into serious negotiations about its nuclear program. The EU and the United States accuse Iran of developing nuclear weapons. Iran, however, denies this, and insists on its right to use nuclear energy for peaceful purposes.

The embargo will have painful consequences for both sides. The EU has to manage without the oil, while Iran, for its part, will lose the revenue. Despite the hostility that exists between the two sides, in the long-term the world's fourth-largest oil producer and its second-largest oil consumer are dependent on one another.

Greece will be worst hit

The statistics reveal who will be worst hit by the sanctions. Until now, around a fifth of Iranian oil exports have gone to the EU – but less than six percent of the EU's oil came from Iran. Germany only sourced one percent of its oil requirement from there.

"At present, of all the European countries, it's Greece that has the biggest problem," explains the Munich-based oil expert Volker Blandow from the Association for the Study of Peak Oil and Gas (ASPO). "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, however, Greece will have to go to an oil exchange to meet its requirements, says Blandow – and the country does not have the ready cash it needs to make the customary advance payment. Spain and Italy, on the other hand, Iran's other two big customers in Europe, have reoriented themselves in time. "They were able to find alternative suppliers - in Saudi Arabia, for example,” says Blandow. "European countries were able to prepare for the embargo, in the relative certainty that it would be imposed." EU Foreign Ministers agreed in January that imports would cease on July 1.

No money for Ramadan

Many analysts, Blandow included, believe Iran will be hit hard by the sanctions. "The Iranian economy is very, very dependent on the revenue from oil exports,” he explains. “It's said to be around 30 to 40 percent of gross domestic product. And when 20 to 30 percent of that is missing, it's certainly going to hurt.”

The oil sanctions are just one among many measures being taken against Iran by the EU and the United States. Financial exchange and the exchange of goods have also been severely restricted. The Iranian currency has dropped considerably as a result. “Right now, the Iranian government is caught in a double bind,” says Blandow. “They urgently need the revenue from oil sales. And at the same time, the price of goods from abroad has risen sharply because of the currency depreciation.”

According to reports in the media, many Iranians are worried because Ramadan, the Muslim month of fasting and feasting, will start in a couple of weeks, and they don't know how they will be able to afford the celebratory evening meals. Blandow believes it's a situation that could cause trouble for the Iranian government. “In 2010, Egypt consumed more oil than it produced. The country was unable to export any of its oil. At the same time, the [Arab Spring] uprising began because the government couldn't subsidize the food and energy sectors as it had done in previous years.” The Iranian government, however, denies that the sanctions are already having an effect. “These countries [the EU and the US] are creating more problems for their own people than they are for us,” the senior cleric Hojatoleslam Kazem Seddiqi told the state news agency IRNA.

Ships at anchor in the Mediterranean Sea
Iranian oil tanker? If so, it's no longer welcome in the European UnionImage: dapd

Cat and mouse game

As it has done in the past, Iran is looking for creative ways to get around the sanctions. There have been media reports that ships from the state's own fleet of tankers have recently started sailing under the flag of the Pacific island Tuvalu in order to evade the sanctions. A pipeline in Egypt could also serve as a loophole for the Iranians. There is speculation that Iranian tankers could pump their oil into the southern end of the pipeline in the Red Sea, while at the northern end of the pipeline, in the Mediterranean, other tankers could pick up the oil and bring it in to European ports. Only the Egyptians would know about the switching of the labels. It's an interesting speculation, given the backdrop of Egyptian-Iranian rapprochement. Blandow too has heard talk of this. “It would make things time-consuming and expensive,” he comments. “And it's not unlimited. So the current cuts in production that we're seeing in Iran of between 20 and 30 percent are probably what can't be got out of the country by indirect means. These are losses they are going to suffer whatever happens.”

Low oil price

Since the beginning of March, the price of oil has dropped by about 30 percent. Demand is low. “When the economy picks up again in Europe and the USA, clearly Iran will have the advantage. Then we will need this oil. Then the oil price will rise very steeply. In a situation like this, it would be interesting to see how the West reacts. Whether it places greater importance on ethics, or on the price of oil.”

Iran has the oil that, sooner or later, others will urgently need. The energy-hungry countries of China and India are still on the cards as potential customers. Yet Iran still has plenty to lose through the EU embargo, says Blandow. “The conveyor systems are mostly foreign-built. With a strict embargo in place, sooner or later they would stop getting replacement parts. That can't be in the interests of Western countries. We are very reliant on Iranian oil long-term. So the adoption of sanctions as a threatening position can only be temporary. People will do all they can to prevent any permanent damage being done.”

Author: Hendrik Heinze / cc
Editor: Gregg Benzow

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