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January 04, 2012

Analysts Warn of Downside to Sanctions on Iran Oil Exports

Analysts say a possible European Union embargo on Iranian oil may do little to get Tehran to cooperate on its nuclear program, and could possibly contribute to a potentially dangerous standoff with the Middle Eastern nation. 

Diplomats suggest the European Union will likely agree on an embargo on Iranian oil exports within weeks - a move supported by members such as France.

Speaking during a visit to Turkey late Wednesday, French Foreign Minister Alain Juppe said Paris hopes the oil sanctions will be signed-off by European foreign ministers by the end of January.  He believes solutions will be found for EU countries like Greece and Italy that depend heavily on Iranian oil.

The possible sanctions underscore a toughening approach by the West to get Iran to cooperate on its nuclear program. Western nations believe Iran is trying to build a nuclear bomb, while Tehran insists its activities are for peaceful purposes.

But will an oil embargo work? Not as far as oil analyst Paul Stevens of London-based Chatham House is concerned. "If you look at history, oil embargoes have never, ever worked and never, ever been effective…so it's not going to work," he said. "It's just going to cause a great deal of disruption."

Stevens says EU countries that depend on Iranian oil can find new suppliers - like the Gulf states. But Iran may also find new buyers for its oil in Asia.

Iranian officials have downplayed the impact of Western measures - including new U.S. sanctions that could reduce Iran's ability to sell oil and other exports.  But Tehran also has threatened to close the critically important Strait of Hormuz, the entrance to the Persian Gulf.

Leo Drollas, director and chief economist at the London-based Center for Global Energy Studies, believes closing the strait could affect about 16 percent of global crude oil shipments. "The fallout would obviously hit the prices straight away in the future markets," Drollas stated. "Oil prices would rocket because of the fears of what might happen."

But Drollas believes the spike would be temporary as the countries adjust and the West taps into its reserves.

For his part, Stevens of Chatham House doubts Iran will go through with its threat to close the Strait of Hormuz - in part because it relies on the waterway for its own oil exports. But he believes the deepening standoff between Tehran and Washington, in particular, is creating a dangerously unstable situation. "By trying to limit Iran's oil exports, it [Washington] is essentially escalating the situation into what could very rapidly become a crisis," Stevens noted.

More effective, Stevens and other analysts say, are tougher financial sanctions.  Sanctions already in place have already taken a toll on Iran. The EU is considering sanctions against Iran's central bank, but member nations are reportedly still divided on the measure.