Oil embargo on Iran and the threat to the
Straits of Hormuz
Standard Note:
SNIA/6190
Last updated:
20 January 2012
Author:
Ben Smith
Section
International Affairs and Defence Section
EU countries are preparing to impose a new round of sanctions on Iran, to include an
embargo on the import of oil. The US has also enacted new legislation which will target the
Iranian central bank and make oil trading more difficult for Iran. Iran has responded with
some threatening comments about closing the Straits of Hormuz, leading to a rise in the oil
price. It has also signalled that it is open to re-starting talks. This note details these
developments and gives some samples of recent expert commentary.
Contents
1 Existing EU sanctions
3 2 Proposed new EU sanctions
3 3 US sanctions
3 4 The effects of an embargo
4 5 Threats to the Straits of Hormuz
4 6 Talks to re-open?
5 7 Reaction
6 8 Commentaries
8 This information is provided to Members of Parliament in support of their parliamentary duties
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Main points:
•
Forthcoming sanctions by both the EU and the US will significantly increase the
pressure on the Iranian government.
•
The proposed EU oil embargo and the US sanctions on dealings with the Iranian
central bank will not come into force straight away. When they do, they will lead to
some increases in oil prices for Western markets and some decreases in prices in
Asian markets.
•
These changes will reduce the Iranian government’s revenues from oil but are not
likely to last long. The world oil market is so large and complex that it is possible to
circumvent restrictions.
•
As the threat of harsher sanctions has mounted, Iran has threatened to block the
Straits of Hormuz, the vital waterway through which a large proportion of the world’s
seaborne oil is shipped. It has conducted military exercises in the Persian Gulf.
•
Most analysts agree that Iran will in fact be reluctant to take that step because it does
not have the military capacity to close the straits for long, because any closure would
hurt Iran more than Western countries and because it may not want to play the
Hormuz card too soon.
•
At the same time as issuing threats, Iran has indicated that it is willing to re-start
negotiations on its nuclear programme. Some see this as another delaying tactic,
others as evidence that the threat of sanctions has worked.
•
Many commentators agree that sanctions will not stop Iran’s nuclear programme. On
the other hand, few see many prospects for successful negotiations in a year when
elections are to take place in both Iran and the United States, and both sides see
advantage in appearing tough on the issue.
2
1
Existing EU sanctions
The EU has banned technical assistance to Iran’s nuclear programme and oil and natural
gas industries, imposed an arms embargo on Iran, including a ban on the export to Iran of
goods that might be used for internal repression.
The EU has also imposed travel restrictions and asset freezes on persons and entities
involved in the Iranian nuclear programme and with serious human rights abuses in Iran. 1
These measures have been gradually strengthened: further entities and individuals were
added to the restricted list in December 2011. 2
2
Proposed new EU sanctions
On 3 January it was reported that representatives of the Greek government had announced
that they would no longer oppose EU legislation to impose an embargo on imports of Iranian
oil to the EU. This paves the way for the measure to be agreed on 30 January, when the next
meeting of EU foreign ministers is planned.
In the past, Greece had resisted such a move because it imports a large proportion (some
35%) 3 from Iran and was concerned that the embargo would lead to a damaging rise in
energy costs at a time when the Greek economy has severe difficulties. Greece has become
particularly dependent on Iranian oil because suppliers from other elsewhere have become
reluctant to do deals with Greece because of fears of a Greek economic collapse.
The EU also plans to impose restrictions on the Iranian central bank and another bank,
although EU diplomats are wary of choking off legitimate trade. Another proposal that
emerged was to ban trade in Iranian gold, diamonds and other precious minerals. 4
3
US sanctions
Existing US sanctions against Iran include an almost total ban on imports from Iran, including
imports of oil and refined oil products, and a ban on supplying goods or services including
financial services that might benefit the Iranian oil industry. 5 It has also implemented the full
range of UN-mandated sanctions, including restrictions on the sale of arms and items that
might further the nuclear programme and on individuals associated with the programme.
On 31 December, the US administration signed into law a piece of legislation which, when it
comes into effect, will impose sanctions on foreign institutions which have transactions with
the Iranian central bank. The US legislation will make it more difficult and less profitable for
Iran to sell oil abroad, since most oil sales involve transacting with the Islamic Republic’s
central bank. The law will not come into force for six months, but some suggested that it had
already had an effect, as the Iranian currency, the rial, fell to new lows against the US dollar.
The UK has already imposed sanctions on the Iranian central bank. 6
The aim of the US administration is not to terminate Iranian oil exports to the world
completely or quickly. Not only would this push oil prices up sharply and damage Western
1
2
3
4
5
6
For detail on the EU’s present sanctions regime against Iran, including references to the EU legislation that
implements it, see European Commission- Restrictive measures
“Council reinforces restrictive measures concerning Iran”, European Council press release, 1 December 2011
“EU countries preparing to impose oil ban on Iran”, Euobserver, 4 January 2012
“Iran oil gold and banks on EU hit-list”, EUobserver, 18 January 2012
For an overview of US sanctions against Iran, see the US Treasury’s page Iran Sanctions
For more on UK sanctions, see the following Library standard notes: In Brief: The Financial Restrictions (Iran)
Order 2011 of 13 December 2011, and Iran's nuclear programme: an update of 21 July 2011
3
economies, it might push Iran into attempting to block the Straits of Hormuz and spark the
wider conflict that many fear. Instead, Washington wants to increase costs for Tehran and
force it to sell its oil at a lower price, by making Iran search for new and less lucrative supply
contracts.
On 12 January, the US State Department announced that it had sanctioned three non-US
companies using the provisions of the Iran Sanctions Act 1996. The companies were Zhuhai
Zhenrong Company, a Chinese company, Kuo Oil (S) Pte. Ltd. (based in Singapore), and
FAL Oil Company Limited (based in the United Arab Emirates). 7 The department said that
Zhuhai Zhenrong is Iran’s largest supplier of refined petroleum products.
4
The effects of an embargo
According to OPEC, Iran exported 890,000 barrels per day to Europe in 2010, with the
biggest customers being Italy, Spain, Greece and France. 8 Analysts say that the likely effect
of an EU embargo on imports of Iranian oil would be to increase oil prices in western
markets, at least for a while, and reduce them in Chinese and other Asian markets.
On 6 January, it was reported that the South Korean and Japanese governments were
approaching Saudi Arabia in search of new oil supplies, to lessen their dependence on
Iranian oil. The moves were a response to pressure from the US government. 9
Saudi Arabia has stated that it is prepared to increase production to make up for embargoed
Iranian supplies, while Iran has said that it would view that as hostile behaviour. It remains
unclear exactly what the attitude of the Saudis (and the other Gulf oil producers) is. Despite
public statements, Iran and Saudi Arabia may have agreed on an approach that means that it
may not be as easy as generally assumed to replace lost Iranian supplies with oil from the
other side of the Persian Gulf.
Any UN Security Council resolution imposing sanctions on Iranian oil is thought to be nearimpossible, because of the clear opposition of Russia among others. Nevertheless, with
countries such as South Korea suggesting that they will reduce their dependence on Iranian
oil, the likelihood is that Iran will have to offer discounts to find new customers for its output,
reducing somewhat Iranian revenues.
5
Threats to the Straits of Hormuz
At the end of December, Iran conducted military exercises near the Straits of Hormuz, the
strategically important entrance to the Persian Gulf, through which about a third of the
world’s sea-borne oil is shipped. 10 These exercises were not related to the Iranian nuclear
programme, but did involve testing a ground-to-sea missile which could be used to hit
shipping in the Straits of Hormuz. The missile test was also taken as a threat to the US Navy:
in early January, an Iranian general said that the US should not send an aircraft carrier that
recently left Dubai back into the Gulf, saying “Iran is not used to repeating its warnings and
warns just once”. 11 Iran warned that it controlled the Straits of Hormuz and could close them.
7
8
9
10
11
“Three Companies Sanctioned Under the Amended Iran Sanctions Act”, US State Department press notice,
12 January 2012
Paul Stevens, An Embargo on Iranian Crude Oil Exports: How Likely and with What Impact?, Chatham House,
January 2012
“Seoul and Tokyo look to Saudi oil as a way to lessen reliance on Iran”, Financial Times, 6 January 2012
“US rebuffs warning from Iran”, Financial Times, 4 January 2011
“US rebuffs warning from Iran”, Financial Times, 4 January 2011
4
The US Navy responded by saying that it would not allow shipping in the Gulf to be
disrupted.
The exchange caused the
price of Brent crude oil to
rise by more than 4% in
one day. Oil price rises are
good for the Iranian
government and bad for
Western economies, so to
that extent the increase in
tension has served Iran
well so far. Despite alarm
in the markets, however,
many analysts think that
the chance of imminent
action in the Gulf is low.
Iran is unlikely to want to
take the initiative in closing
the straits because:
• the
Iranian
economy would be worst
hit by the move, as it is
more dependent on the
export of crude through
Hormuz than countries in
the West
Map courtesy of University of Texas
•
any closure would not last very long as it would invite a full response from the US
Navy, which could take out Iranian naval facilities relatively quickly
•
such action could invite wider armed conflict and possibly military strikes against the
Iranian nuclear programme. It would also unite its opponents.
An Iranian naval officer was widely quoted as saying that closing the straits would be “easier
than drinking a glass of water”. A Woodrow Wilson Center expert disagreed:
In reality, it would be like drinking a glass of gasoline. And I think the logic of closing
the Strait of Hormuz for Iran is like the logic of conducting a suicide bombing. They
would hurt others, but they will hurt themselves the most, and they will also be hurting
their chief commercial and strategic patron, which is China. 12
6
Talks to re-open?
There is evidence that Iran may be pursuing its own twin-track policy, making conciliatory
moves both towards the West and towards its Gulf neighbours, at the same time as
aggressively rejecting proposals to tighten sanctions. In mid-December 2011, the Iranian
intelligence minister Heydar Moslehi visited the Saudi capital, reportedly with a large
12
Haleh Esfandiari, “What Have Sanctions Done to Iran's Economy, People?”, PBS Newshour, 4 January 2012
5
delegation. The meeting is alleged to have centred on oil production and security matters. At
the OPEC meeting a few days later, Iran was widely reported to be attempting to placate the
Saudis. 13
On 31 December, Iran’s chief nuclear negotiator, Saeed Jalili, said that Iran wanted to reopen talks with the permanent five members of the Security Council plus Germany (P5+1) on
the nuclear programme. He said: ''We formally declared to them to return to the path of
dialogue for cooperation.” 14
On 12 January, Ali Larijani, the influential Speaker of the Iranian parliament, said in the
Turkish capital of Ankara that Iran was prepared to enter "serious" talks with the P5+1. Mr
Larijani said: "all issues can be easily solved through negotiations ...but this time, we want
the talks to be serious, it should not be fake.” 15 Reports suggest that any new round of talks
could be held in Turkey. A top Iranian official visited Moscow on 18 January to discuss the
possibility of restarting negotiations. Russian officials presented Ali Bageri with a proposed
framework for negotiations with the P5+1, possibly based on Russian proposals made in
August. Ali Akbar Salehi, Iranian foreign minister, said that talks would restart soon:
Negotiations are going on about venue and date. We would like to have these
negotiations. Most probably, I am not sure yet, the venue will be Istanbul. The day is
not yet settled, but it will be soon. 16
Western diplomats are not convinced by the apparent readiness in Iran to go back to talks. A
spokesman for the EU’s High Representative Catherine Ashton said: “There are no
negotiations under way on new talks. We are still waiting for Iran to respond to substantive
proposals…made in…October." 17 EU diplomats reportedly concluded that Tehran was
“chasing headlines.” One British source was quoted as saying:
The European Union sent a letter to Iran some time back inviting them into fresh talks
which they have not responded to. Iran must be ready to return to the table without any
preconditions. What we are seeing with Salehi's comments is Iran courting
international media rather than the international community. 18
7
Reaction
British Defence Secretary Philip Hammond mentioned the Iranian threats to close the Straits
of Hormuz at his speech to the Atlantic Council on 5 January 2011. He said that any such
attempt would be unsuccessful:
It is in all our interests that the arteries of global trade are kept free, opening and
running. For example, our joint naval presence in the Arabian Gulf, something our
regional partners appreciate, is key to keeping the Strait of Hormuz open for
international trade.
The Royal Navy will continue to play a substantial role as part of the Combined
Maritime Forces, both at the headquarters in Bahrain and through our mine countermeasure vessels which help maintain freedom of navigation in the Gulf.
13
14
15
16
17
18
“Iran in push to placate Saudi Arabia”, Financial Times, 15 December 2011
“Iran Asks to Resume Talks on Its Nuclear Programme”, Associated Press, 31 December 2011
“Iran Accepts Turkish Nuclear Talks Offer”, IHS Global Insight, 13 January 2012
“Western Diplomats Deny Iranian Claims of New Nuclear Talks”, IHS Global Insight, 19 January 2012
Ibid
“West rejects Tehran talks claim”, Financial Times, 19 January 2012
6
Disruption to the flow of oil through Strait of Hormuz would threaten regional and global
economic growth. Any attempt by Iran to do this would be illegal and unsuccessful. 19
Giving more detail on UK forces in the region, Mr Hammond said,
We have mine counter-measures capability, we have a frigate present there, and we
are an integrated part of the allied naval task force in the Gulf. One of the missions of
that task force is to ensure that those shipping lanes remain open. 20
On 3 January, a spokesman for the White House said that the pugnacious comments were a
sign that the Iranian authorities were worried about the effectiveness of sanctions:
I think it reflects the fact that Iran is in a position of weakness. It's the latest round of
Iranian threats and it's confirmation that Tehran is under increasing pressure for its
continued failures to live up to its international obligation. Iran is isolated and is
seeking to divert attention from its behaviour and domestic problems. This is simply a
measure of the impact that sanctions have been having on Iran and the broad
international support for taking -- putting pressure on Iran and isolating Iran because of
its refusal to live up to its international obligations. 21
The government of Nicolas Sarkozy in France has been active in pursuing a stronger line
against the Iranian nuclear programme. On 3 January, French foreign minister Alain Juppé
said he is convinced that Iran’s nuclear ambitions are not entirely peaceful: "Iran is pursuing
the development of its nuclear arms, I have no doubt about it," and called on the EU to freeze
Iranian central bank assets and impose an embargo on oil exports. 22
Some commentators have said that the fact that presidential elections are approaching in
both France and the US has helped to push Iran up the agenda and may be responsible for
some of the robust rhetoric emerging from Washington and Paris. 23
The Russian foreign minister Sergei Lavrov warned against the West’s rising tide of hostility
to Iran, suggesting that it was making the “catastrophe” of armed conflict more likely:
As for the chances of this catastrophe happening, you would have to ask those
constantly mentioning it as an option that remains on the table. I have no doubt in the
fact that it will only add fuel to the fire of the still–simmering Sunni–Shia conflict. And I
do not know where the subsequent chain reaction will end. 24
Chinese premier Wen Jiabao, on a visit to the Gulf to discuss oil supplies to China, among
other things, made an unusually strong condemnation of any attempt by Iran to get hold of
nuclear weapons: “China adamantly opposes Iran developing and possessing nuclear
weapons." 25 He also defended Chinese imports of Iranian oil, saying that this was normal
trade activity and that legitimate trade should be protected. Despite his defence of Iranian oil
exports, commentators detected a distinct distancing from Tehran on the part of Beijing.
19
20
21
22
23
24
25
“Hammond warns Iran over threat to close oil trade route”, BBC News Online, 5 January 2011
Ibid.
White House, Press Briefing by Press Secretary Jay Carney, 3 January 2012
“Iran nuclear crisis: France wants 'stricter' sanctions”, BBC News Online, 3 January 2012
See for example Geoff Dyer, “Primaries open new political front in conflict with Tehran”, Financial Times, 6
January 2012
“West on a path to war with Iran, says Russia”, Daily Telegraph, 19 January 2011
“China begins to turn against Iran”, Daily Telegraph, 19 January 2012
7
There have been signs, however, that the temperature of the rhetoric has peaked. Israeli
defence minister Ehud Barak said on 18 January that a decision to attack Iran was “far off”. 26
This followed a decision earlier in the month to postpone joint US/Israeli military exercises in
the Middle East, and a comment by Binyamin Netanyahu, the Israeli prime minister, that
Israel thought that the sanctions imposed by Western powers were beginning to exert
pressure on Iran. 27
8
Commentaries
Max Boot and Bradley Russell, of the Council on Foreign Relations, say that a closure of the
Straits of Hormuz is unlikely because it is too difficult to achieve. They argue that Iran tried
this during the Iran-Iraq war during the 1980s, without much success:
The Iranians must realize that the balance of forces does not lie in their favour. By
initiating hostilities they risk American retaliation against their most prized assets—their
covert nuclear-weapons program. The odds are good, then, that the Iranians will not
follow through on their sabre-rattling threats. 28
Greg Thielman and Benjamin Seel, of the Arms Control Association, argue that even if it is in
neither side’s interest to push for war, the parties might stumble into it on the basis of flawed
information or misunderstandings. The authors call for improvement in communication with
Iran:
To prevent war, there is an urgent need to establish lines of bilateral communication at
all levels—between military forces in the region, between diplomats, and between
senior officials. 29
IISS expert Michael Elleman said that although Iran could not close the Straits of Hormuz, at
least not for long, it could increase sharply the costs of transporting oil. He said however, that
many Iranian claims about the effectiveness of its missile arsenal are exaggerated. He cast
doubt on the usefulness of the Iranian surface-to-ship missile for example:
[Iran] recently unveiled a missile called the Persian Gulf that it claims is capable of
hitting ships as far away as 250 kilometres from the shore. I don't believe this claim.
The analysis we've done on that particular missile is that it is not nearly accurate
enough to be able to threaten a specific naval vessel in the Gulf, but nevertheless it
gives an indication of what they are seeking and what they are trying to deter. 30
Paul Stevens, for Chatham House, says that Iran is unlikely to close the straits even in the
event of an embargo and would probably choose other means of retaliation. He also says
that an oil embargo is unlikely to work:
History is littered with failed oil embargoes ranging from Cuba, Rhodesia and South
Africa to the Arab oil embargo and the embargo against Iraq after 1990. However,
history appears to have passed by the decision-makers of the EU. It is also worth
pointing out that an EU oil embargo would greatly strengthen the Ahmadinejad regime
at a time when it is under considerable pressure, especially with parliamentary
elections looming in March. Unemployment remains very high, as does inflation. The
26
27
28
29
30
“Decision on Whether to Attack Iran Is 'Far Off,' Israeli Defence Minister Says”, New York Times, 19 January
2012
Ibid.
“Iran Won't Close the Strait of Hormuz”, Wall Street Journal, 4 January 2012
Greg Thielman and Benjamin Seel, Diplomatic Engagement: The Path to Avoiding War and Resolving the
Nuclear Crisis, Arms Control Association, 4 January 2012
Michael Elleman, “How Serious Are Iran's Threats?” (interview), Council on Foreign Relations, 5 January 2012
8
latter has been greatly aggravated by the removal of many price subsidies in the last
twelve months. Moreover, in the last few weeks the value of the Iranian rial against the
dollar has fallen dramatically (at one point reaching a devaluation of over 30 per cent,
before recovering somewhat). This has damaged the credibility of the government and
will fairly quickly aggravate the problem of inflation. Given the crucial role of oil in Iran’s
deepest political DNA, an EU embargo would put the population solidly behind the
current regime. 31
According to Mr Stevens, concentrating on Iran’s financial system would be more effective.
Suzanne Maloney, of the Brookings Institution, says that the Islamic Republic has endured
far harder conditions than those likely to be caused by the West’s squeeze on Iranian oil
exports, for example during the Iran-Iraq war, when Iran earned less than 10% of the
revenues it received in 2010. 32 She argued that by attempting to undermine the Iranian
economy and thereby the present regime, policymakers would increase the insecurity felt by
the Iranian leadership and cause it to redouble efforts to obtain nuclear weapons capability.
This, according to Maloney, has narrowed the focus of US policy onto regime change:
What needs to be addressed is the disturbing reality that the Obama administration's
approach offers no viable endgame for dealing with Iran's current leadership. The
impression that the sanctions are permanent -- indeed, the new law does not specify
any conditions that Tehran might satisfy in order to lift the siege on its central bank -conforms to Iranian hard-liners' darkest delusions about Washington's intentions. By
embracing maximalist measures, the White House has come full circle, abandoning,
along the way, its earlier optimistic efforts at engagement. In doing so, it has implicitly
relinquished the prospect of negotiating with the Islamic regime: given the ayatollahs'
innate mistrust of the West, they cannot be nudged into a constructive negotiating
process by measures that exacerbate their vulnerability.
American policy is now effectively predicated on achieving political change in Tehran.
Such an outcome will likely prove even more elusive than productive talks with the
revolutionary regime -- something the United States has sought for 33-years. 33
Shashank Joshi, writing for the Royal United Services Institute, argues that, as sanctions
may have the result of hardening support for the regime and making the leadership more
insecure and therefore more likely to pursue nuclear weapons, a successful sanctions
programme either has to allow the leadership to feel secure enough to compromise, or it
must lead to the regime’s downfall:
... sanctions should either be calibrated so as to cause pain without threatening the
regime, or rendered so overwhelmingly punitive so as to achieve regime change
without enabling a long period of nuclear gestation; the present course achieves
neither. 34
However, with elections in both Iran and the United States, Mr Joshi notes that it is difficult to
see any creative moves to resolve the crisis:
31
32
33
34
Paul Stevens, An Embargo on Iranian Crude Oil Exports: How Likely and with What Impact?, Chatham House,
January 2012
“Obama’s Counterproductive New Iran Sanctions: How Washington is Sliding Toward Regime Change”,
Foreign Affairs, 5 January 2012
Ibid.
Shashank Joshi, “Iran and the West: Playing a Zero-Sum Game”, RUSI Commentary, January 2012
9
That is where we stand: diplomacy that hasn't worked, sanctions whose effects are
unpredictable, and each side lashing themselves ever tighter to the mast. 35
For the Economist, the new round of sanctions is unlikely to change Tehran’s course, at least
in the short term, but is welcome, if only because it reduces the likelihood of an Israeli strike.
The writers call on policymakers not to “forget the carrots”:
Iran’s divided regime has yet to reach the point of asking itself whether sticking to its
nuclear guns is really worth the pain. It may never do so. Yet the West should persist in
reminding it of the gains it would enjoy if it were to eschew deceit and show flexibility,
say by letting spent fuel from reactors be taken to neutral third countries. A “grand
bargain”, seemingly forgotten, is still worth tabling. In exchange for Iran abjuring
nuclear weapons, the West would stop seeking regime change. An end to Iran’s
theocracy is desirable, but the West is unlikely to get a nuclear deal unless it offers
carrots as well as sticks. A bargain will be hard for Mr Obama to sell to voters; but he
should ask the Republicans if they really want to start a war. 36
35
36
Ibid.
“Not quite too late”, Economist, 21 January 2012
10