Iranian oil embargo
21/02/2012
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Iran reacts to the EU oil embargo by restricting supply to the EU
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Prices spike but this is likely to be a short-term issue
Back in January, the long-running stand-off between Iran and the West over Tehran's nuclear programme shifted into a more unpredictable phase after Europe decided to impose an oil embargo on the Islamic republic. The EU decided no further oil contracts could be struck between the member states and Iran, with existing oil delivery deals only being allowed to run until July. Several countries shared reservations about the move, with Greece the trickiest problem since it imports Iranian oil on very favourable conditions. Reaction from Iran finally came last week, as official sources said on Wednesday that the Iranian government had cut off oil exports to six of the European Union countries in response to the sanctions. The pro-government channel Press TV interrupted its usual broadcast to report that the measure affects the Netherlands, Spain, Italy, France, Greece and Portugal, amongst which are nations that most depend on Iranian energy. Of the 2.2 million barrels of oil Iran exports a day; around 18% is bound for European markets, according to the U.S. Energy Information Administration. Iran has also threatened to close the Strait of Hormuz waterway if the oil embargo goes ahead, a move that would choke off global oil supplies and send international tensions soaring.
This announcement was followed on Sunday by news that Tehran would stop supplying oil to the UK and France. A spokesman for the oil ministry, Ali Reza Nikzad Rahbar, was reported as saying on the ministry's website that Iran would "sell our oil to new customers".
The price of Brent crude, the benchmark for oil prices in Europe, has been steadily rising over the past few weeks as investors grow increasingly worried about Iran's nuclear ambitions, with the US, UK and Europe all imposing sanctions to restrict Iran's ability to sell oil. Prices for Brent crude oil rose to their highest level since April 2011 on fears that Iran might halt shipments of oil to Europe, spiking to $119.53 per barrel immediately following the reports. However, economists generally do not believe this to be a long-term problem. Julian Jessop, Chief Global Economist at Capital Economics, believes this increase in prices will be short-lived for three main reasons.
"This development is not a complete surprise, because with the EU embargo announced last month but in force from July, the countries involved have already had some time to find alternative sources, with Saudi Arabia and Libya keen to meet any shortfall."
"Secondly, the six countries targeted by Iran are likely to require less oil this year anyway because of weakness in their economies. The impact of the Iranian ban may simply be to ensure that the burden of weaker EU demand is felt by Iran rather than by other oil exporters. Thirdly, Iran will still need some customers for oil and US pressure to boycott Iran is having little effect in the larger markets in Asia. China and India, in particular, are taking advantage of their much stronger bargaining positions to insist on lower prices for imports of Iranian oil, which will help offset any upward pressure on global oil prices from EU countries seeking alternative supplies."
