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What Happens When We Place Oil Sanctions On Iran?

On Friday, March 30, 2012, President Obama announced tighter oil sanctions on Iran despite the rising gas prices in the US. These sanctions are the toughest yet since the sanctions began late last year and are meant to economically impact Iran so that it is forced to give up its nuclear program which countries around the world fear. Due to the previous sanctions in place, about 300,000 fewer barrels of oil have been exported each day from Iran. The tougher US sanctions are to take effect on June 28 and the European Union’s full embargo is to take effect on July 1.

As part of this sanction, the US has imposed a “with us or against us” mentality. Not only does it sanction Iran but any bank, company or government that does business with Iran. Countries like China, India, Japan, South Korean and about 10 other countries are large purchasers of Iranian oil and will need to reduce their imports by June 28 or else they could face sanctions as well.

While this is a peaceful mechanism for the US to use, it has immense ramifications for the world in terms of its ability to get the oil it needs to function. In his announcement yesterday, President Obama said: “There is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran or through foreign financial institutions.”

Before the sanctions, Iran exported 2.2 million barrels of oil each day and analysts estimate that about a million barrels per day are in danger of being lost through these sanctions. Now the world needs to figure out how it can replace that oil from other countries. One of the big players is Saudi Arabia and US officials have already met with leaders to discuss ramping up oil output. Saudi Arabia is estimated to be able to produce approximately 1.5-2 million barrels of extra oil each day which barely covers the oil lost from Iran.

Of course, rising gas prices have already hit Americans hard and with these sanctions and the fear of not being able to satisfy demand, gas prices are sure to rise even further. An increase in gas prices is said to potentially help Iran. Additionally, this is a risky proposition for the Obama Administration which does not want to go into the election season with high gas prices in Americans’ minds.

In order to help keep gas prices lower, it has been suggested that the Strategic Petroleum Reserves could be tapped into both in the US and in other similar reserves around the world. This is a delicate decision though because the use of the reserves now decreases how much we have left if we had a real emergency such as the Strait of Hormuz being cut off where 17 million barrels of oil travel through each day. Iran has threatened to close this crucial passage but experts do not believe it is possible. The use of the Strategic Petroleum Reserves is unlikely to be approved in the US because it is a politically sensitive topic where the Republicans will accuse the Obama Administration of using the reserves to try to lower gas prices as part of his effort to get reelected when we need to save the oil for a real shortage.

Foreign reliance for oil has long been a source of contention in the US, with a great divide between the Republicans and Democrats on how it should be addressed. The gas prices have spiked 20% this year in the US and this has caused concern over foreign dependence. This is evidenced by the controversy over domestic drilling and the building of the Keystone Pipeline which was proposed to run from Canada to Mexico. In January the Obama Administration rejected the full pipeline but recently he announced an Executive Order allowing the southern portion of the pipeline to be built. This is another reason why the Obama Administration fears rising gas prices based on these sanctions and would like to tap into the reserves. His stance on rising gas prices and domestic drilling has been quite contradictory up until now but with these sanctions going into effect soon, higher gas prices are sure to follow and the Administration will have a few short months to decide how to tackle this problem before the election in November.

Only time will tell if the sanctions on Iran will be successful in stopping their nuclear program. Iran is reportedly already facing internal problems with importing goods like food into the country and with their economy including rampant inflation and dramatic currency devaluation. However, if Iran is determined to keep its nuclear program which it seems to be, these sanctions may not be enough for the government to give up the program even if their population is facing hardship. It is also unknown just how long the US and the rest of the world can hold out before they will need Iran’s oil to meet demand. This will surely encourage countries with oil, like the US, to begin or strengthen their domestic oil programs, but it is unfortunately too late to just begin these programs now. The US and Europe will be dependent on Saudi Arabia over the next few months or years and there is still no guarantee that this will be enough to meet demand.




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