- The Washington Times - Monday, January 23, 2012

U.S. leaders praised the European Union’s embargo on Iranian oil Monday, even though it triggered a jump of more than $1 per barrel in global oil prices and signaled the potential for a rise in U.S. gasoline prices in the weeks ahead.

Iranian officials called the embargo an act of “psychological warfare,” and lawmakers renewed threats to block the Persian Gulf’s Strait of Hormuz, through which one-fifth of the world’s crude oil is transported.

The EU’s move showed significant widening of international support for the U.S.-led effort to choke off the Iranian economy to pressure Iranian leaders to abandon a nuclear program that the Islamic republic claims is peaceful. Western nations and Israel fear Iran is trying to make an atomic weapon.

By agreeing to the oil embargo, the EU’s 27 foreign ministers delivered “another strong step in the international effort to dramatically increase the pressure on Iran,” Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy F. Geithner said in a joint statement.

With EU nations buying about 25 percent of the 2.5 million barrels exported by Iran daily, analysts say the embargo’s impact will be felt on both sides, especially among EU members already struggling under austerity measures tied to the Continent’s economic crisis.

Iran remains the second-largest producer in the Organization of Petroleum Exporting Countries (OPEC), and the embargo’s ultimate impact on global oil prices remains to be seen.

President Obama authorized new sanctions on Iran’s oil sector and the central bank when he signed the Defense Authorization Act on Dec. 31. However, implementation of those sanctions was delayed for six months to prevent a sudden increase in global oil prices.

News of the EU’s move Monday sent the New York stock market price of crude oil to $99.58 per barrel, an increase of $1.25 from Friday.

A joint statement issued by the leaders of the EU’s most powerful nations said that while “the door is open to Iran to engage in serious and meaningful negotiations,” Iranian leaders have “failed to restore international confidence in the exclusively peaceful nature of its nuclear program.”

“Until Iran comes to the table, we will be united behind strong measures,” said the statement by British Prime Minister David Cameron, German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Mrs. Clinton and Mr. Geithner noted that the EU embargo bolsters the new U.S. sanctions with the goal of “targeting transactions with the Central Bank of Iran and by providing strong incentives to reduce Iran’s ability to earn revenue from its oil exports.”

The stakes are high for such measures because a further jump in oil prices could threaten the EU’s delicate economic recovery.

In the U.S., average gasoline prices have hovered at $3.85 per gallon this month. Analysts say that gradual increases in the cost of crude take about a week to impact prices at the pump.

The oil embargo’s overall impact on global crude prices may be more difficult to calculate.

“At this point, there’s at least some short-term confidence that there’s an excess in the market to absorb any disruptions in Iranian supply, but there’s a lot of uncertainty and ultimately the key player will be China,” said Suzanne Maloney, a senior foreign policy fellow focused on Persian Gulf and Middle East energy policy at the Brookings Institution.

Despite a recent trip to Beijing by Mr. Geithner to drum up support for the oil embargo, China has resisted.

Mrs. Maloney noted that Chinese companies that have little to no exposure to U.S. markets or the U.S.-led sanctions regime might seek to buy Iranian oil at cut-rate prices.

“So long as there are players looking to make a few dollars buying discounted crude from Iran, and as long as the Iranians are looking to get any sort of revenue, those barrels will find their way into the market,” Mrs. Maloney said.

“In fact, it’s probably the preference of the Americans and the Europeans, because the goal here is not to depress worldwide access to oil supply. The goal is to constrain Iran’s revenues.”

In the interim, an intended outcome of the joint U.S.-EU embargo would be for crude oil out of Iraq and Libya to begin to “command a premium on the global market,” she added.

The catch is that different EU nations seek to buy different grades of crude.

For instance, it is not clear whether Italy, which buys about 12 percent of its crude oil from Iran, will be able to switch to other sources because part of Italy’s refining industry is tuned specifically for the Iranian oil.

Still, the European Union is the No. 1 buyer of Iranian oil and China is No. 2, said Silvia Kofler, a spokeswoman for the EU’s delegation in Washington.

Mohammad Ismail Kowsair, a deputy in Iran’s national security and foreign affairs committee, was quoted in state media as saying the Islamic republic could move to close the Strait of Hormuz “if the sale of Iranian oil is violated in any way.”

According to wire reports, the Iranian news network Press TV quoted Alaeddin Boroujerdi, the committee’s head, as saying: “Tehran will not grin and bear it when its interests are undermined.”

State television quoted Iranian Foreign Ministry spokesman Ramin Mehmanparast calling the EU’s embargo “psychological warfare,” and asserting it “will not stop our nation from obtaining its rights.”

The Iranian reaction is likely only to intensify as the sanctions take effect, according to Trita Parsi, author of “A Single Role of the Dice: Obama’s Diplomacy With Iran.”

“The sanctions are going to put a tremendous amount of pressure on the Iranian economy, which the Iranian people are going to be faced with more than the government,” Mr. Parsi said. “The question is: What will this pain translate into?

“Is it more likely that it will translate into a change of policy and compromise, or capitulation on the nuclear issue? Or is it more likely to translate into a counter-escalation by the Iranians in the Persian Gulf targeting the oil economy or perhaps even further?

“I fear there’s a greater likelihood there’s going to be a further escalation that can lead to an actual war,” Mr. Parsi said. “I think the way the Iranians view it, right or wrong, is that if they capitulate to the sanctions, it’s the beginning of their downfall.”

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