Can Europe’s oil boycott really sink Iran?
Iranian President Mahmoud Ahmadinejad visiting the Natanz uranium enrichment facility, 270 kms south of Tehran, in 2008.
January 24th, 2012
11:56 AM ET

Can Europe’s oil boycott really sink Iran?

Editor's Note: Juan Cole is Richard P. Mitchell Collegiate Professor of History at the University of Michigan.  The following is reprinted from his blog Informed Comment. The views expressed in this article are solely those of Juan Cole.

By Juan ColeInformed Comment

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.

The views expressed in this article are solely those of Juan Cole.

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Topics: Iran

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soundoff (119 Responses)
  1. Indian

    Nothing will happen to Iran. The sanctions will actually cause backfire and may actually help Iran. India, China, Russia will buy Iran's oil in GOLD instead of dollars, thanks to the sanctions. And which countries are known for their gold? Hint: Most of them in Asia. And once Iran's oil is bought in Gold, we all know what's going to happen to the US $$$$$- bye bye US! We're masters in playing chess, espcially since we invented it. US/EU keeps on shooting their own foot.
    Check this:
    http://rt.com/news/iran-india-gold-oil-543/

    January 26, 2012 at 8:50 pm | Reply
    • Sean

      Exactly, actually they were doing this since 2008, when the price of gold was $800.

      January 27, 2012 at 8:56 am | Reply
    • Clinton

      It's amazing to me how little people know... how blinded and stupid they are... Indian, not one word of your argument made any sense.... you're a dunce... a complete idiot... The US has more wealth than any country on Earth, we're not concerned with a few billion in gold you moron.... and Iran can keep thinking it's all good... til the missles rain down on their Nuke facilities and a mushroom cloud hangs over Tehran.

      January 27, 2012 at 11:58 am | Reply
  2. gremlin96

    mite be a good ideal for a lot of contrys to up date there sewage systems to collect methane. with a bunch of methane being used there would be less need for oil from other contrys. it would not be a 100% fix but it would be renewable sorce of fuel. on the plus side the water from the sewage plants would be a bit cleaner.

    January 26, 2012 at 9:46 pm | Reply
  3. Paganguy

    Can anybody enlighten me how Israel obtained the enriched Uranium to build 100 bombs they posess?

    January 27, 2012 at 12:27 am | Reply
    • DAVID KAPLAN

      Who the h-ll do you think worked on the atomic bomb program for the US? Eskimos? Your question is too dumb to answer.
      BTW, another stupid question like that and we will take the bomb back since irresponsible idiots should not have this in their possession.

      January 27, 2012 at 1:33 am | Reply
  4. Clinton

    Gotta love the blame game coming from Iranians and Iran sympathizers... "The US was involved in an overthrow of it's Government back in the 50's" ....... SERIOUSLY!!!!!! SO WHAT!!!!! .... first off the CIA didn't overthrow the Government single handedly... There has to be an uprising in order to SUPPORT IT in the first place!!!!! second, how the heck do you blame the current Government for something done in the 1950's? Should we be blaming the current German government for what Nazi Germany did? Are you people really that Naive? Wake up... this is an Iranian regime, created by Iranians, it's 2012 and they are trying to weaponize their Nuclear program... The US and the West is responding by applying sanctions to this country and I can guarantee if necessary they will launch an attack against those Nuclear facilities... The US and the West have reacted with exceptional care to avoid conflict to this point, we could be waving a US flag in Tehran right now... or watching a smoldering Tehran on CNN... but we're giving these imbeciles plenty of chances to back down.... a Nuclear Iran is unacceptable... not only is Ahmedinijad stupid enough to use them against people.... he can also end up causing Iran's neighbors in the Middle East to begin building their own... with the kind of conflicts that have emerged over the years and the instability of Middle Eastern Governments, i don't think this can be allowed to happen.

    January 27, 2012 at 11:54 am | Reply
  5. eman

    Strangest way to the marriage application

    http://www.bestofthebestofall.com/forums/viewtopic.php?f=38&t=1142

    January 27, 2012 at 6:07 pm | Reply
  6. sameh

    Lighting engineer played the minds of the masses

    http://upload40.com/11675.html

    January 27, 2012 at 9:12 pm | Reply
  7. Ford

    To answer the question! No It doesn't sink Iran, it will certainly make a hole in "that" ship but that hole can be fixed one way or another. but it will sink Europeans!

    January 27, 2012 at 11:25 pm | Reply
  8. jakson

    The most powerful horror film in the history of world cinema
    http://www.bestofthebestofall.com/forums/viewtopic.php?f=38&t=1141

    January 28, 2012 at 9:31 pm | Reply
  9. bribarian

    nobody even understands why iran is being bullied, so much like the iraq war catastrophe

    January 28, 2012 at 9:34 pm | Reply
  10. Toni

    Iranian Lead is an insane guy, what to think about accussing France to stole clouds that impedes raining in Iran and also denies the Holocaust; as we say in Spain: si no está loco le anda raspando....
    Have a nice day, only 6ºC in Palma de Mallorca(Spain)

    January 28, 2012 at 9:52 pm | Reply
  11. Muin

    These sanctions do unify Iranian people as one nation. Neo-con literally dominates U.S foreign policy regardless of change in presidency.

    January 29, 2012 at 11:14 pm | Reply
  12. Deng

    Stop this nonsense. Nobody wants war or sanctions except special interest groups. When the press says "Americans" it is only referring to CNN+FOX+Military Industrial complex which are the top war-mongers. 70% of Americans are against war and want to bring troops home. Every country and every people has a right to self determination and freedom. VOTE RON PAUL !!

    January 30, 2012 at 3:03 am | Reply
  13. Patriot

    Things are not going good for US, EU. It happens some times but we will be back with a bang. But what i was surprised is that India which is considered to be neutral has been supportive to iran(atleast regarding the sanctons). I am afraid that we are creating frustration to neutral nations like India which may have terrible consequences.

    February 12, 2012 at 3:03 am | Reply
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