During this week, the European Union’s (EU) embargo on Iranian oil came into full effect. This unprecedented historical move bears many signs indicating the importance of changes that have affected global energy markets in recent years.
Over the past decades, oil producing countries were the ones that determined the rules of the game in oil markets, as exporting countries have been using oil as a tool to apply pressure on consumers, especially during the Arab-Israeli war in 1973 during which time Arabs had halted oil exports leading to prices jumping five times.
Four decades after the 1973 war, the situation has changed and oil consuming countries are now pressurising oil exporting countries after they recently reducing their dependence on oil, especially from the Gulf countries by the developing alternative sources of energy. The countries to do so include the Americas, Brazil and Venezuela and the US.
If this approach continues, major and grave changes are expected to take place and could affect strategic, political and economic aspects as well as alliances, which until recently were considered as postulates.
The oil industry have never witnessed such developments before, current tensions have formulated intense economic and political stands that have led to further deterioration in Iran’s relations with world powers. It is expected that the EU embargo on Iranian oil will have grave consequences on its economy, which is already affected by previous sanctions and boycott procedures.
Iran’s oil exports are expected to drop by 50 per cent, after falling by 30 per cent since last March. As a result of boycott, Iran’s losses are expected to reach $2.5 billion per month.
But, if more countries join in boycotting of Iranian oil, these losses will increase several times and have serious impact on economic conditions and living standards.
In fact, the negative effects on Iran’s economy will not result from the EU embargo on the country’s oil, but also from the indirect action from countries that have refused to boycott Iranian oil, such as China and India who are making the most of the situation by agreeing to swap oil for commodities and services and also making conditions mode of payments.
This is especially happening because these countries are suffering from economic slowdown and slow growth rates brought on by the global and Eurozone crisis, a fact that has resulted in reducing oil demands in their markets.
Meanwhile, Russia has reduced oil export duties by 12 per cent allowing it to increase exports in the future — a move that may help the nation meet any shortages in supplies.
Some analysts have previously referred to the possibility of an increase in oil prices due to sanctions on Iran’s oil, thus warning EU countries of the gravity of the move.
However, oil prices have fallen consecutively in contradiction to analysts’ predictions for several reasons. First is the increase in oil production by other countries and the slowdown in economic growth in the major points of consumption. Also the reduction of speculation due to the EU crisis and its associated problems have not helped.
Therefore, the blam in the fall in prices is given to the increase in oil production. But putting the blame oil production only is far from reality because it is part of the problem, not the entire problem.
These issues together have brought oil prices to relatively low levels — as low as 20 per cent in three months. This adds more pressure on Iran’s economy, a fact that can be clearly concluded from Tehran’s call to the Opec to hold an emergency meeting to take necessary measures to halt the drop in oil prices.
But, the response by Opec members, including Venezuela, Iran’s ally, was very weak. Everyone is convinced that oil markets are no longer subject to considerations of supply and demand alone as was the case in the past, but it is due to other factors.
Although Iran has developed several scenarios to cope with these sanctions, they are far from reality. It would be useless for a single country to face the world’s most powerful and influential countries.
Tehran needs to develop new scenarios — rational and balanced ones as well as more objective to keep in line with global changes, including changes in the global energy balance.