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Crude calculations

30 November 2011 By Una Galani

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.

 

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