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January 22, 2012

EU Imposes Oil Embargo on Iran

by Al Pessin

The European Union has imposed an oil embargo on Iran, effective July 1 - taking away 20 percent of Iran’s current oil sales. The embargo is intended to increase pressure on Iran’s government to allow inspections to ensure its nuclear program is only for peaceful purposes, as Iran's leaders say it is.



The ban on importing oil from Iran was unanimously approved by the 27 European Union foreign ministers during a meeting in Brussels Monday. Its effective date was delayed to give some members time to implement existing contracts and to enable the ministers to review Iran’s reaction, and any change in its behavior, before putting the ban into force.  But EU members will not sign any more contracts for Iranian oil, effective immediately.

The EU’s foreign policy chief, Catherine Ashton, said the embargo is aimed at convincing Iran to return to talks about its nuclear program.

“I hope that Iran will respond positively to the letter that I sent, that it will respond positively to the messages we have sent, and come back to the negotiating table,” she said.

The EU also froze assets of the Iranian Central Bank that are deposited in the EU and banned trade with Iran in gold, diamonds and precious metals. And it tightened restrictions on selling Iran technology that has military applications.

The EU embargo is the latest in a series of efforts by western nations to persuade Iran’s leaders not to build a nuclear weapon. Iran denies it is planning to do so, and says the embargo will not affect its policies. But western experts believe the country’s sophisticated nuclear facilities go beyond what would be needed for peaceful purposes. Ashton spoke about that after Monday’s meeting.

“If you look at the low-enriched uranium that they have, you have to ask a very simple question, ‘What’s it for?’  And when I ask that question, as I do repeatedly, I don’t get an answer,” she said.

The EU foreign policy chief called on Iran to comply with its international obligations in a transparent way, and to prove it is not seeking nuclear weapons. The International Atomic Energy Agency, which has also repeatedly raised concerns about Iran’s nuclear program, is sending a team to Iran at the end of this month.

Ashton also said she has spoken to other countries, including Iran’s biggest oil customer, China, about either joining the sanctions or at least not jumping to buy the oil that the European Union will not buy.

Julian Jessop of the London consulting firm, Capital Economics, says the combined effect of an EU embargo and cooperation from other countries should be a significant economic blow for Iran.

“This is going to have substantial effect on the Iranian economy," said Jessop. "I think Iran is going to find it very difficult to find an easy market for its oil, at least at the same sort of prices it was achieving before.”

Iran has threatened to block shipping at the entrance to the Persian Gulf in response to any oil embargo.  But Jessop says the Iranians will more likely respond to the EU embargo with some steps designed to convince the world that its nuclear program is only for peaceful purposes.  But, he adds, there is a problem with that.

“The problem is, of course, nobody will know for sure," said Jessop. "Iran has been playing this game very successfully for many years. I’m sure that the regime would love to keep the option of weaponizing its nuclear program. But the bottom line is that economics is important here as well. If there were prolonged sanctions from more western economies against Iran, then the Iranian economy would be hit extremely hard.”

Jessop expects a brief increase in oil prices, based on fears of Iranian military action. And there was a slight increase on Monday. But Jessop thinks oil prices will fall significantly in the longer term. He says Iran’s economic and political competitors, particularly Saudi Arabia, are expected to increase production to help the European boycotters.  

Still, even a short-term oil price increase would be bad for struggling European economies, particularly large-scale Iranian oil importers Greece, Italy and Spain. Greece pressed for the delayed implementation of the embargo. But Jessop notes that Europe’s economic downturn is reducing the continent’s need for oil, cushioning any price spikes.