Oil embargo on Iran and the threat to the Straits of Hormuz
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.
• 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.