This paper considers the possible outcomes of an EU embargo on oil exports from Iran.
- The initial impact is that the EU countries will have to find alternative supplies to replace their imports of heavy, sour crude from Iran.
- The hunt for alternative supplies will create transitional friction for oil prices. Thus prices for heavy source crude in the Atlantic basin markets would increase and in Asia-Pacific they would decrease as Iran tried to find alternative outlets for the crude originally destined for European markets.
- So far the analysis has assumed that Iran simply accepts the EU embargo without retaliation. This is extremely unlikely.
- There has been much speculation that Iran's response would be to inhibit the flow of oil through the Strait of Hormuz. This is unlikely. First, any closure would equally damage Iran's ability to export the oil on which its economy is so dependent. Second, serious and credible attempts to close the Strait are in effect Iran's 'big guns' on the issue of whether or not the United States (or Israel) would launch a military attack on Iran.
- A more effective means of putting pressure on Iran would be for the United States to persuade the EU to extend sanctions to financial transactions. An oil embargo alone cannot succeed.
Ignore the hyperbole on Hormuz: embargoes don't work
Paul Stevens, Financial Times, January 2012