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Europe’s Iranian oil ban is affordable but risky

Europe’s Iranian oil ban is affordable but risky

Investors are worried that an EU oil embargo could mean a step closer to military attacks between the West and Iran.

December 3, 2011 12:58 by

A European ban on Iranian oil might be affordable, but comes with risks. Attacks on Britain’s embassy in Tehran will add momentum to France’s call for an EU-wide embargo. If the economic slowdown hits demand, cutting off supplies from the Islamic Republic won’t hurt too much. But once agreed, an embargo could be in place for many years.

A ban would hurt Iran by forcing it to sell more of its oil to existing Asian buyers at discounted prices. If the country was financially weakened, the theory goes, it will find it harder to fund and maintain domestic support for its nuclear programme — though decades of sanctions have so far failed to change its behaviour.

Iran accounts for 5.2 percent of global oil production and exports more than half of that amount, according to the 2011 BP Statistical Energy Review. Its supply of roughly 2.4 million barrels per day to the global market makes Iran a more significant producer than Libya was before the recent uprising. Reuters calculates that EU countries currently buy around 450,000 barrels per day from Iran. Debt-stricken Greece, Spain and Italy are amongst the biggest consumers.

OPEC forecasts that oil demand in Western Europe will fall by 100,000 barrels to 14.3 million barrels per day in 2012 in a scenario where the region’s GDP grows by 1.9 percent. If growth turns out to be slower — as seems increasingly likely — the loss of Iranian oil could be shrugged off.

But if economic growth recovers, the EU could eventually be relying on OPEC heavyweight Saudi Arabia to use its spare capacity to fill the gap. Assuming the kingdom wants to maintain its market share in Asia, it would have to increase production to meet European demand, according to advisory firm Petromatrix. That could create an oversupply which is not in Saudi Arabia’s economic interests.

Investors will also fret that an EU oil embargo could move the West one step closer to a military attack on Iran’s nuclear facilities. If that sentiment pushes up the price of Brent crude further from its current level of around $111 per barrel, a European embargo of Iran may prove far from pain-free.

— Britain ordered the closure of the Iranian embassy in London and expelled its staff on Nov. 30. It also pulled its own embassy staff out of Iran, a day after demonstrators stormed two of its diplomatic compounds in Tehran in protest against new sanctions imposed by London.

— The UK warned of “serious consequences”. The United Nations Security Council condemned the attacks “in the strongest terms” and US Secretary of State Hillary Clinton said they were an “affront” to the international community.

— On Nov. 21, Britain ordered UK financial institutions to stop doing business with their Iranian counterparts and with the central bank of Iran.

— The sanctions were in response to the International Atomic Energy Agency’s latest report on Iran which suggested the country had worked on designing an atomic bomb.

— On Nov. 23, the European Union agreed in principle to sanction around 200 Iranian people, companies and organisations.

— France is pressing for international sanctions strong enough to paralyse Iran over its nuclear policy, French Foreign Minister Alain Juppe said in an interview with l’Express magazine.

— Iran has called the IAEA report “politically motivated”. The country’s parliament voted on Nov. 27 to reduce diplomatic ties with Britain which would have forced out the country’s ambassador.

— Iranian protesters storm British diplomatic compounds

— OPEC World oil outlook:

(The author, Una Galani, is a Reuters Breakingviews columnist. The opinions expressed are her own; Editing by Peter Thal Larsen and David Evans)

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