Can A European Ban on Iranian Oil Push Tehran to Fold Its Nuclear Program?

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Ebrahim Norouzi / Jamejamonline / Reuters

Iranian ships participate in a naval parade on the last day of the Velayat-90 war game on the Sea of Oman near the Strait of Hormuz in southern Iran January 3, 2012.

With its agreement in principle to impose an embargo on Iranian oil, the European Union has taken a big step closer to the U.S. stand to force Tehran to renounce its suspected military nuclear develop program. But while it seems clear that earlier Western sanctions against Iran over the nuclear dispute have had some impact on that country’s economy, there’s no guarantee the new moves will prove any more effective in finally forcing Tehran to abandon its nuclear ambitions. Meanwhile, the economic pinch on Iran the move is meant to create may also lead to painful consequences for Europe–and the world—if Iran retaliates. With evidence suggesting Iran is rapidly progressing with nuclear military development that Tehran continues to deny even exists, Western leaders appear to feel that taking no action is far more dangerous than embracing measures that may not work out as intended.

News of Wednesday night’s E.U. agreement to ban oil imports from Iran came after the long-discussed proposal had finally gotten the backing of formerly reticent member states like Italy, Spain, and Greece. As a result, French Foreign Minister Alain Juppé—who first voiced France’s desire to tighten the screws on Jan. 3—said the major hurdles had been cleared for EU foreign ministers to officially adopt the boycott during their Jan. 30 summit. “On that occasion I hope we can adopt this embargo on Iranian oil exports,” Juppé said Wednesday. “We are working towards that, and things are on track.”

A lower-ranking French diplomat indicated that—in contrast to a number of previous sanctions the West has imposed on Iran—an oil embargo, in conjunction with recent U.S. action, should pack a harder punch. “We can’t promise this will produce a swift resolution of the dispute, but we are certain the European oil boycott will get Iran’s attention,” the diplomat said.  “If things go as planned, this won’t be something Tehran will be able to easily shrug off.”

The reason? With oil sales representing around 60% of Iranian economic activity, such a blow would in theory have a considerable impact on the country and its regime. Iran’s government is already heading into March parliamentary elections amid spreading public anger over rising prices and the falling value of the Iranian rial, which has recently lost around 40% to the dollar in large part to the impact of existing Western sanctions. That squeeze on Iran was tightened as 2011 closed out, when U.S. President Barack Obama signed a law imposing formidable financial punishment on companies found to be doing business with Iran’s central bank—a move which makes paying for Iranian oil a major risk.

The additional loss of oil revenues from Europe—which buys about 17% of Iran’s total production—could further push Tehran to decide whether to renounce its alleged military nuclear program or continue to defy international demands and risk more unrest from an economically deprived public.

Will that theory work in practice? There’s much hope it will, especially now that the E.U.  proposal has overcome earlier hesitation from member states that rely heavily on Iranian oil. Yet that’s also the first place where things could get sticky. Greece, for example, dropped its initial aversion to a ban on the oil it gets under very flexible financial agreements from Iran—though presumably only after Athens got a quid pro quo from partners to allow it to find other sources of oil that won’t bust the country’s debt-swamped payment capacities. Similarly, Italy has insisted that a final agreement involve a rolling application of the boycott so Rome can import the vast volumes of Iranian oil it has already bought through advance contracts. Spain is another big buyer of Iranian oil. Collectively, the E.U. turns to Tehran for nearly 6% of its oil imports. As always in Europe, then, working out mutually acceptable details on a position of supposed principle first requires all actors feeling they’ve nothing too important to lose by signing on. “We have to reassure some of our European partners who purchase Iranian oil,” Juppé said after news of the informal EU agreement on a ban went public. “We have to provide them with alternative solutions.”

And perhaps not just European partners—which is where the second risk of the boycott going wobbly arises. Turkey, for example, gets about a third of its oil from Iran—and could  up that amount if Tehran undercuts the E.U. ban by boosting exports to other clients at discounted prices. The same could happen with China, which has already been exploiting Iran’s sanction-choked economic situation to demand better deals in oil transactions. Experts quoted in media reports generally agree Tehran would probably have little trouble finding buyers for European-shunned oil exports—particularly in Asia, and especially if Iran is ready to make an effort on pricing to keep its sales volume up. For the pending E.U. oil ban to have much impact, then, European and American leaders would need to somehow convince decidedly independent-minded nations like China to play along, as well as countries like Turkey—which remains angered at E.U. refusal to grant it membership, and has just embarked on a nasty diplomatic dispute with Paris.

Even if all that were to go well, other perils exist. First, the ban could find many or most European nations having to pay considerably more to new oil suppliers—an expense that could speed up and deepen the slide of E.U. economies into  recession. Then there’s the nightmare scenario of Iran making good on recent threats to retaliate by closing the Straight of Hormuz—the waterway through which 20% of the world’s oil passes. In the wake of those menaces, media reports have quoted industry experts estimating oil prices could rapidly shoot to nearly twice their current levels in the event of a military blockade of the strait. Evidence suggests that could indeed happen: the mere the news of the informal EU agreement on an Iranian oil ban sent Brent crude up $2 to $114 per barrel Wednesday as traders ponders its possible consequences.

“What do we do—nothing?” the French diplomat said with a tart laugh at all the pessimistic what-ifs. “Of course not. In the face of serious and dangerous activity, you consider your options, see which ones are most likely to be effective, and take your stand. Adversity can only be overcome through unity, determination, and constant pursuit of a common goal. Where’s the problem in that?”