Is EU's ban on oil trade with Iran a big dumb mistake?
The European Union (EU) has hit hard on Iran, deciding to ban oil imports from the Middle East nation. The ban is expected to come into effect on July 1, 2011. The EU is one of the major market for Iran's oil and the ban is intended to bring down Iran's oil revenues and force it to abandon its nuclear programme. But will the action backfire on the EU? Is banning oil imports from Iran at a time of high oil prices, tight inventory and above all, an economic contraction the best decision the EU could take?
The EU has also decided to freeze assets of Iran's central bank and eight other banks and also ban trade in Gold, precious metals, diamonds and petrochemical products from Iran. Iran has called the ban “unfair” and a “psychological warfare”
The State television quoted Foreign ministry spokesman Ramin Mehmanparasat as saying that "European Union sanctions on Iranian oil is psychological warfare ... Imposing economic sanctions is illogical and unfair but will not stop our nation from obtaining its rights”. He also went on to add that "The European countries and those who are under American pressure should think about their own interests. Any country that deprives itself of Iran's energy market will soon see that it has been replaced by others”
The Effect of the Ban
With EU deciding to give its member nations almost 6 months to secure supplies before the ban comes into effect, some prominent member's of Iran's think-tank are advising that their country should immediately cease all oil exports to the EU block. The FARS news agency quoted former intelligence minister Ali Fallahian as saying that "The best way is to stop exporting oil ourselves before the end of this six months and before the implementation of the plan”
Reduced supplies from Iran will mean that international inventories available for the EU will tighten significantly. With supply concerns in Nigeria and South Sudan continuing, the EU countries may have to pay higher prices for oil, which in turn will raise prices for all consumable goods in their respective nations- at a time when the economies are going through a recession, personal incomes are falling and unemployment is rising.
Clearly, the EU could have made a better decision. But more importantly, if Iran decides to stop all oil export immediately, the EU will find itself in a crunch.