Iran Oil Embargo Could Hurt Europe and Help China, Russia

The proposed ban on Iranian oil imports could do more harm to West than to Iranian regime.

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On Thursday, Europe's foreign ministers are planning to meet in Brussels, where they will discuss whether to implement an Iranian oil import embargo as a way to pressure Iran to halt its nuclear program. France, in particular, has been advocating such a measure after an international report earlier this month revealed that Iran is moving closer to building its own nuclear weapon.

While the international community seems to agree that something should be done to prevent Iran from increasing its nuclear capabilities, some worry that imposing an oil embargo or other sanctions affecting the country's oil industry could do more harm to the countries imposing the measures than to the Iranian regime itself.

As they face precarious economic situations, countries like Greece and Italy have expressed reluctance to cut off oil imports from Iran, fearing that an embargo could drive up costs of fuel. On the other hand, proponents of the embargo say that the loss of Iranian oil on world supply could potentially be compensated for with increased supply from other oil-producing states, like Saudi Arabia or Libya. Already, for instance, the price of Russian crude oil—which is considered a reasonable substitute for the type of oil produced in Iran—has risen with talks of an embargo.

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There's also disagreement about whether a European embargo would actually put enough pressure on Iran's oil profits, since the majority of Iranian exports go to Asian nations, like China, India, and South Korea.

According to Robert McNally, president of the Rapidan Group, a Washington-based energy analysis firm, western sanctions affecting Iranian oil exports could ultimately benefit countries like China, a regular customer of Iran, which could get a discount on oil if demand elsewhere becomes limited. "The Iranians would have to accept a lower price for their crudes, because they'd have to dump it into Asia. They would have to compete more aggressively to sell what they would be selling in Europe elsewhere," he says.

Also, it's likely that in the case of a direct embargo, or if sanctions are imposed on Iran's central bank—another option on the table that would make it difficult to conduct business with Iran's oil sector—Iran could still find a way to sell its oil supply on the global market, either through illegal smuggling, or through alternate forms of payment, like bartering deals or credit agreements.

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"They could sell this on the black market. You're going to have the Revolutionary Guard further consolidating control of oil exports from Iran, and if oil prices go up, they're actually going to benefit from that," says Jamal Abdi, policy director at the National Iranian American Council. "These measures could be a boon for Iran. They could create windfall profits for Iran by driving up the cost of oil, and they'd end up hurting us."

Abdi also argues that even if the sanctions are indeed successful in limiting oil profits to Iran, the Iranian people, rather than the regime itself, would feel the brunt of the economic losses.

On Wednesday, the U.S. Senate debated a bipartisan amendment, co-sponsored by New Jersey Democratic Sen. Robert Menendez and Illinois Republican Sen. Mark Kirk, that could achieve some ends similar to the provisions European policymakers are discussing. The amendment, which already has the support of 92 senators, would impose sanctions on Iran's central bank, essentially forbidding any company wanting to do business with United States from doing business in Iran. But, it would do so along a gradual timeline and include caveats for the president to delay or halt the sanctions if necessary

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The provision, which would not likely go into effect until March 2012 at the earliest, intends to ensure that the measures "don't spook the oil market," Menendez claimed.

Given the nature of global commodity markets, nearly every tactic proposed would come with a cost, says McNally. But the more gradual measures, like the one proposed in the Senate, could be less harmful to the West while still effectively increasing pressure on Iran as intended. "The idea would be that you're incrementally isolating Iran," he says. "You're starting to cut into the bone here with the crude."