Why Washington's Iran Policy Could Lead to Global Disaster

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In part, Obama is attempting to please America’s other Middle East ally,  Saudi Arabia, which also wants Iran’s nuclear program mothballed.  In the process, the U.S. Department of the Treasury has even had Iran’s banks  kicked off international exchange networks, making it difficult for that country’s major energy customers like South Korea and India to pay for the Iranian petroleum they import.  And don’t forget the administration’s most powerful weapon: most governments and corporations do not want to be cut off from the U.S. economy with a GDP of more than $15 trillion -- still the largest and most dynamic in the world. 

Typically, the European Union, fearing Congressional sanctions, has agreed to cease taking new contracts on Iranian oil by July 1st, a decision that has placed special burdens on struggling countries in its southern tier like Greece and Italy.  With European buyers boycotting, Iran will depend for customers on Asian countries, which jointly purchase some 64% of its petroleum, and  those of the global South.  Of these, China and India have declined to join the boycott.  South Korea, which buys $14 billion worth of Iranian petroleum a year, accounting for some 10% of its oil imports, has pleaded with Washington for an exemption, as has Japan which got 8.8% of its petroleum imports from Iran last year, more than 300,000 barrels a day -- and more in absolute terms than South Korea.  Japan, which is planning to cut its Iranian imports by 12% this year, has already  won an exemption.

Faced with the economic damage a sudden interruption of oil imports from Iran would inflict on East Asian economies, the Obama administration has instead attempted to  extract pledges of future 10%-20% reductions in return for those Treasury Department exemptions.  Since it’s easier to make promises than institute a boycott, allies are lining up with pledges. (Even Turkey has gone this route.) 

Such vows are almost certain to prove relatively empty.  After all, there are few options for such countries other than continuing to buy Iranian oil unless they can find new sources -- unlikely at present, despite Saudi promises to ramp up production -- or drastically cut back on energy use, ensuring economic contraction and domestic wrath. 

What this means in reality is that the U.S. and Israeli quest to cut off Iran’s exports will probably be a quixotic one.  For the plan to work, oil demand would have to remain steady and other exporters would have to replace Iran’s roughly 2.5 million barrels a day on the global market.  For instance, Saudi Arabia has increased the amount of petroleum it pumps, and is promising a further rise in output this summer in an attempt to flood the market and allow countries to replace Iranian purchases with Saudi ones. 

But experts  doubt the Saudi ability to do this long term and -- most important of all -- global demand is not steady.  It’s crucially on the rise in both China and India.  For Washington’s energy blockade to work, Saudi Arabia and other suppliers would have to reliably replace Iran’s oil production and cover increased demand, as well as expected smaller shortfalls caused by crises in places like Syria and South Sudan and by declining production in older fields elsewhere.  

Otherwise a successful boycott of Iranian petroleum will only put drastic upward pressure on oil prices, as Japan has politely but firmly pointed out to the Obama administration.  The most likely outcome: America’s closest allies and those eager to do more business with the U.S. will indeed reduce imports from Iran, leaving countries like China, India, and others in Asia, Africa, and Latin America to dip into the pool of Iranian crude (possibly  at lower prices than the Iranians would normally charge).