EU approves embargo on Iranian oil, despite economic concerns

Some EU countries who agreed to the Iranian oil embargo get as much as 30 percent of their oil from Iran. But as Spain's foreign minister said today, they are 'willing to make the sacrifice.'

The European Union today approved an unprecedented embargo on Iran’s oil industry, outlawing any new contracts effective immediately and giving countries five months to find new suppliers to replace their existing deals.

The EU measures also limited relations with Iran’s central bank, but they fell short of Washington's tougher sanctions and threats to cut ties with any third party that does business with Tehran.

EU foreign policy chief Catherine Ashton said that the “phased embargo,” which comes on top of several rounds of sanctions, “are not an end in themselves. The purpose is to put pressure on Iran to come back to the negotiating table and either pick up all the ideas that we left on the table or to come forward with its own ideas.”

But the measures, agreed to by the 27 member states' foreign ministers, included a clause allowing for the policy to be reviewed in a few months, possibly undermining pressure on Tehran.

The embargo, meant to punish Iran for its defiance of international demands to suspend uranium enrichment, is so far having a muted impact on oil prices. The market appears confident that the embargo will not affect global oil supplies as a whole because other buyers of Iranian oil are resisting joining Western nations.

The EU decision was not without controversy. Greece held out until the last minute, giving in only after the addition of a clause stipulating that the EU would review the policy's effects on member states by May 1, opening the door to exceptions – not unlike the waiver provisions included in US sanctions approved earlier this month.

Greece, by far the most troubled of the EU economies, gets around 30 percent of its oil from Iran at favorable terms.

But the political imperative defeated economic concerns. Spain’s Foreign Minister José Manuel García-Margallo said, “I must be absolutely clear that Spain is one of countries that will sacrifice the most. We understand that the security in the area is priority. Thus, we are willing to make a sacrifice.”

Past sanctions are paying off

The embargo also comes at a bad time for world economies and oil markets. Oil demand continues to increase rapidly, despite the global economic crisis and Europe’s expected recession this year. Supply concerns are also growing outside the Middle East, especially in Sudan and Nigeria, two significant exporters who are facing domestic unrest that could affect their output.

But while Iran could end up benefiting economically in the short and middle term from the embargo, Iran is growing increasingly isolated politically and diplomatically, which will disrupt its economy in the long term. 

Years of increasingly robust sanctions are hurting the Islamic Republic. Oil production is not increasing and the country has failed to develop its natural gas reserves – the second largest in the world. Foreign expertise is hard to come by as countries including Russia and China limit their exposure.

Economic hardship filtering down to most Iranians is also compounding internal political dissent, although regime change is unlikely. And while most agree that Iran has been more resilient to sanctions than anticipated, Western pressure is nonetheless stinging.

EU: We had no choice

The EU has also said that while the embargo will hurt European economies as oil prices rise, concern about Iran’s nuclear development left it little choice. It will be  especially hard for Spain, Italy, and Greece, which together account for three-quarters of Iran's oil exports to Europe.

Iran exports 2.5 million barrels per day, a quarter of which goes to the EU, according to last week’s figures for January-October 2011 published by the International Energy Agency, which advises OECD countries. China buys 22 percent, India 12 percent, and most of the remainder is exported to Turkey, Japan, and South Korea, all considered close EU and US allies.