Support the news
The U.S. Congress has approved legislation that targets the Central Bank of Iran and is intended to make it more difficult for that country to sell its oil abroad.
But the latest sanctions could backfire. Reduced oil supplies on the world market could mean higher prices, and therefore Iran could actually make more money from its oil even if it sells fewer barrels.
The Obama administration had been opposing the legislation on these grounds, though on Thursday it appeared the president would support the measure after minor changes were made at the last minute. State Department spokeswoman Victoria Nuland said that U.S. officials were looking at how to implement the sanction in way that "maximizes the pressure on Iran while causing minimum disruption for friends and allies of the U.S."
The legislation as approved allows some exceptions and permits the White House to waive provisions in the interest of national security.
The new sanction punishes foreign firms that buy Iran's oil through that country's Central Bank. Because of concerns that Iran uses its oil money to finance a nuclear program, the measure had overwhelming support in Congress.
Whether the sanction works depends on how the oil market reacts.
"There is absolutely a risk that in fact the price of oil would go up, which would mean that Iran would in fact have more money to fuel its nuclear ambitions, not less," Wendy Sherman, a State Department undersecretary, testified before a Senate committee earlier this month.
Calibrating World Supply And Demand
That's because Iran's income depends not only on how much oil it sells, but also at what price. In the last two years, its production has gone down due to a lack of investment. But because oil prices are up, it's actually making more money from oil than ever before.
"Iran has done very well out of these high oil prices," notes Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and the author of The Quest, a new book on the energy economy.
"Despite the other sanctions there, the economy continues to function, and they have more money coming into the economy, which gives them more elbow room," Yergin says.
Advocates of the new sanction say they believe other countries will boost their output to make up for reduced Iranian exports. The oil price in that case would not increase.
But do those countries have the capacity to produce enough extra to offset the lost Iranian oil? Yergin isn't sure.
"There is some capacity to make up for it, but not a lot of capacity," he says.
Saudi Arabia's Role
Most of the extra oil would have to come from Saudi Arabia. But at this week's OPEC meeting in Vienna, the Iranian oil minister claimed the Saudis told him they would not boost production to make up for any decreased Iranian exports resulting from sanctions.
The Saudis themselves wouldn't comment.
At the last OPEC meeting, in June, the Saudi and Iranian delegates quarreled. But Jason Schenker of Prestige Economics, who was in Vienna this week, says that judging by the way the Saudi oil minister emerged from the meeting, there was apparently less tension this time.
"Someone said to the minister, 'What do you think? How was it? How did it go? Did it work out?' And he waved his arms big and open and said, 'Hey, I'm smiling," Schenker says.
If the Saudis do not increase oil production and if the new sanction means the Iranians are not able to sell all that they produce, the supply and demand mismatch would presumably drive up the oil price. Iran in that case could indeed benefit, just as the Obama adminstration fears.
A Treasury Department official, responding to congressional approval of the Iran sanction provision, says the administration nevertheless shares the goal of applying pressure on Iran, "including by action against the Central Bank of Iran, and we will use all the tools at our disposal to do so."
The challenge of calculating how to reduce Iranian oil revenue without disrupting the global oil market has led some analysts to propose a fine tuning of the sanctions effort to target Iran's oil sector more precisely. One idea is to force Iran to accept a discounted price for its oil.
Who Will Buy Iranian Oil?
If European countries, for example, agree not to buy Iran's oil, but China and India boost their own Iranian oil purchases by an equal amount, the global oil market should be unaffected.
"It doesn't mean no one is going to buy [Iranian oil]," says Schenker. "It just means different people will buy it. Don't worry, those little piggies will get to market." With fewer customers, however, Iran could be forced to accept a lower price for its oil and thus would receive less revenue.
A similar result could be obtained if the European Union were to impose a tariff on Iranian oil imports, as some have proposed. In order to preserve its market share in Europe, Iran would have to lower prices by an amount corresponding to the tariff. Other countries in that case would demand the same discounted price from Iran.
Of course, there is another scenario under which Iranian sanctions would be effective. The global economy could go into recession, with the demand for oil diminishing as a result. In that case, Iranian oil revenues could suffer, either from lower global oil prices or from a decrease in exports.
But everyone else would be hurting as well.