About the EU banning Iranian crude

Foreign Policy just posted my article on the EU ban of Iranian crude. Last month I mentioned on this blog that I didn’t believe the ban would be adopted. But it now seems obvious that European economists and diplomats have settled their differences and decided the EU can handle a shift away from Iranian supplies. Titled “The Unexpected Logic of the EU’s Ban on Iranian oil,” the article details the many factors that make an embargo more acceptable than ever for EU members:

Any shock to the system will be cushioned by several factors. Libya and Iraq are set to increase exports this year; these additional barrels could replace Iran’s share of the European market. New projections from the International Energy Agency (IEA) are also encouraging. In their last public report, the IEA offered a “more comfortable market outlook than looked likely six months ago.” According to the report, global demand for crude from the Organization of Petroleum Exporting Countries (OPEC) will likely shrink this year by 300,000 b/d, thus providing more slack in a tight market.

I also explain why Iran will be forced to sell oil at a discount to Asian customers:

Chances are the regime will not curb production even if it temporarily lacks customers. Doing so is risky because the country’s oil infrastructure is not in prime condition; after decades of sanctions, shutting in production could result in unforeseen technical failures, and future problems when trying to return to maximum output. Continued production means Iran will be forced to store oil while waiting for buyers to satisfy current contracts. With 450,000 barrels accumulating daily, Iran could find itself with millions of barrels of oil — stored at home and off-shore — waiting for the right customer months later. Opportunistic traders could eventually buy up dozens of these cargoes at a steep discount.

Taken together, these developments are not being received well in Tehran. It remains to be seen whether or not a European ban will force the regime to rethink its nuclear posture. But the United States should welcome the move. It certainly adds to the chorus of condemnation Iran faces right now. It also could shrink government revenues significantly. Hopefully sanctions like these help spawn a broader, more intense debate in the Islamic Republic about the utility and cost of the country’s nuclear program. Iraq and Libya appear set to benefit either way.

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