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EU embargo on Iran: Is China cheering?

Europe's sanctions were bold, but here's how they could backfire.

Iran strait hormuz war game oil embargoEnlarge
An Iranian Saeqeh missile is launched during war games on April 25, 2010 in southern Iran, near the Strait of Hormuz, the narrow strategically located waterway through which 40 percent of world's seaborne oil supplies pass. The Jan. 23 European Union embargo on Iranian oil could backfire by driving Iran into China's strategic reserve. (Mehdi Marizad/AFP/Getty Images)

BOSTON — Europe is often dismissed as punching below its weight in the geopolitical arena. 

But it's hard to criticize the European Union for the tough Iranian oil embargo it enacted today, in hopes of thwarting Tehran's nuclear arms ambitions. The move is particularly bold, considering that it could worsen the continent's already perilous economic woes.

Still, there's no certainty that the scheme will work. Sanctions are a blunt weapon, wielded for many years against countries like North Korea, Cuba and Iran itself, with little to show in terms of positive political change.

One major problem with sanctions is that they often carry outsized unintended consequences. In Cuba, for example, Fidel Castro for years blamed the country's moribund economy on Uncle Sam's trade restrictions. 

So will today's oil embargo against Iran be any different?

Read more: Iran sanctions demonstrate EU resolve.

Many sanctions schemes are, frankly, lame, such as a 2010 ban on Persian carpets, or the United Nations' oil-for-food program with Iraq; Saddam remained one of America's largest oil suppliers even as George W. Bush prepared to invade.

These sanctions are different, hitting where it hurts. Iran earns a major portion of its GDP from oil exports, and Europe comprises about one-fifth of its market. Europe's embargo comes on top of tough US sanctions, signed into law at the end of 2011, that crimp Iran's oil revenues by making it difficult to do business with Iran's central bank

The Iranian economy has long been weak, and there's always a chance that the strain from sanctions could embolden Iran's opposition, possibly ushering in democratic or pro-West reforms. There's also a chance that the pressure could encourage Iran to return to the negotiating table, although that hardly seems likely considering the hardline position of the country's leaders.

Instead, it seems that both sides have reached a point at which it will be difficult to back down. Considering that it could only be a matter of time before Iran achieves nuclear weapons capability, war appears increasingly inevitable. 

Read more: IAEA confirms Iran Uranium enrichment

As for unintended consequences, the embargo comes at a high cost, especially for Europe's fragile economy. Iran is the world's third-largest exporter, and the second biggest supplier to Europe. The country produced 4.3 million barrels per day in 2009, and sold more than half of that on the international market.

To give an idea of how the embargo might affect prices at the pump, Iran's exports are nearly twice Libya's. When civil war broke out in Libya last year, oil prices soared by about $20 per barrel.

Taking Iranian oil out of the global market could add as much as $40 to the price of a barrel of oil, Bank of America analyst Sabine Shels said in a recent CNBC interview.

On the flip-side, Iran won't stop pumping oil, and some countries will continue to buy it. One such customer is almost certain to be China. The embargo, in fact, could save China a fortune.

"I think the real beneficiary of [the EU oil embargo against Iran] would be China, because they will likely squeeze Iran and get their oil imports at $20 or $30 dollar discount, and use that oil to fill their strategic petroleum reserve," Shels told CNBC.  

Meanwhile, upheaval in Nigeria, turmoil in Iraq and a still-unsettled Libya mean that oil prices in the West could be in for a steep rise in 2012.  

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http://www.globalpost.com/dispatch/news/regions/europe/120123/eu-embargo-iran-china-cheering