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Can Sanctions Alone Get Iran To Negotiate?

Filed by KOSU News in World News.
January 25, 2012

A problem with sanctions is they don’t always work as intended.

If the U.S. and Europe don’t buy Iran’s oil, but other countries pick up the slack, for example, nothing is accomplished. Or if some Iranian oil is taken off the market but the price goes up, Iran could earn just as much from its oil even though it is selling less.

Mark Dubowitz runs the Iran Energy Project at the Foundation for the Defense of Democracies. His organization supports the Iran sanctions and has an international team of researchers, mathematicians and economists working to show how the sanctions can do exactly what they’re meant to do.

“We’ve identified Iran’s major oil purchases, how much they’re buying in thousands of barrels a day [and] we look at how much oil revenue each country is contributing to Iran,” Dubowitz says. “Then we run scenarios based on a certain change in output.”

Dubowitz and his team are assuming that over the next six months, as the sanctions take effect, the European Union countries will cut their purchase of Iranian oil by 80 percent. Not 100 percent, as some will still leak through. They also assume India, Japan and Korea will cut back their oil purchases from Iran.

Are Those Assumptions Realistic?

India, Japan and Korea are big consumers of Iranian oil. India’s foreign minister says his country will not abide by the U.S. and EU sanctions. But Dubowitz and his team say it’s more important to look at what Indian refinery operators do on their own. Especially since U.S. sanctions would punish foreign companies that buy Iran’s oil.

“A number of the refiners have significant U.S. interests and assets,” he says. “We believe that a number of Indian refineries are going to make an independent decision to comply with U.S. sanctions because they don’t want to risk getting sanctioned and cut off from the U.S. market.”

So that’s India. As for Japan and South Korea, Dubowitz thinks those governments will want to protect their companies from U.S. sanctions. He says they do not want to get into a fight with Congress during election season.

“They are absolutely paranoid at the prospects of Japanese and South Korean companies ending up on somebody’s ‘name and shame’ list,” he says.

To be spared that embarrassment, Japan and South Korea are likely to reduce their Iranian oil purchases by 15 percent according to this model. That’s enough to show they’re at least making an effort.

So, from Europe to Asia, those are where the cuts occur.

China, on the other hand, is projected to increase its purchase of Iranian oil.

In all, by this team’s calculation: Iran will see a net loss of about 500,000 barrels each day due to sanctions. That alone would cost Iran money.

But in addition, Iran might be hurt another way. With other countries cutting back on their imports, the countries that buy more oil, notably China, could insist that Iran sell to them below market price.

In this case, Dubowitz and his team predict China will be able to negotiate about a 15 percent discount.

“We actually assess that if there were no other buyers of Iranian oil, China could actually negotiate a 40 percent discount,” he says. “Now of course there are going to be other buyers of Iranian oil, so the Chinese are not going to have absolute negotiating leverage; 15 percent puts it at actually a pretty reasonable end of the range.”

Between the loss of some exports and the need to accept a lower price, Iran under this model, could lose $20 billion dollars a year; quite a blow for an already weak economy.

Sanctions Might Not Be Enough

NPR ran these projections by some global energy consultants. In general, they agreed Iranian oil exports are likely to decrease, though perhaps not as much as Mark Dubowitz’s Iran Energy Project is predicting.

The other consultants also foresaw limited damage to the global economy. Whether the Iranians will be forced to offer steep discounts on their oil, however, is not so clear.

“We don’t see a huge discounting occur,” says Jamie Webster, a Middle East oil analyst at PFC Energy. “Now the amount we’ve seen in the past … that may rise, but I still don’t see it as being a huge amount that it’s going to impact their revenue significantly enough that it’s really going to put them in a bad spot.”

Of course, even if Iran is put in a bad spot, whether that would be enough to drive its leaders to the nuclear negotiating table is another question entirely. [Copyright 2012 National Public Radio]

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