UN Sanctions on Iran and the Possible Effects on the Global Oil Market

The United Nations Security Council voted unanimously at the end of March to impose new sanctions on Iran in order to persuade Tehran to abandon its plans to enrich uranium.  [1] There have been mixed reactions to the move, with some saying that sanctions will effectively isolate the rogue Iranian regime and it’s President, Mahmoud Ahmadinejad, who has been a thorn in the side of the United States and the Bush administration as it has tried to achieve its policy objectives in the Middle East.  Others, however, have called the latest sanctions a weak attempt with little chance of success in regards to actually bringing about the end of Iran’s nuclear ambitions. 

The reasoning behind this criticism is that the new U.N. resolution, which most notably places a ban on arms trade with Iran and freezes some the country’s overseas bank accounts, does not touch the oil trade, which is where much of Iran’s wealth comes from, but is also where minor shock waves can turn into major tremors in the world economy. [2] Thus, as long as Iran has the ability to bring about a major shock to the price of oil and the potential catastrophic effects that would come with it, the U.S. must continue to apply pressure delicately in order to meet its policy objectives without pushing so hard that the costs will outweigh the benefits.

Resolution 1747 was passed on Saturday, March 24, by a unanimous vote of the United Nations Security Council, in order to pressure Iran to stop its program of enriching uranium. [3] The resolution imposes five new measures, which include an asset freeze of twenty-eight of Iran’s high profile overseas bank accounts, a ban on Iranian arms sales, a suggestion that countries “exercise vigilance and restraint” from selling heavy arms to Iran, a suggested travel ban on Iranian military officers and scientists, and a suggestion that no new loans or financial assistance be provided to the Iranian government except for humanitarian reasons. [4]

The unanimous vote symbolizes a compromise that was reached between the stronger approached favored by the U.S. and Europe, and the softer approach wanted by Russia and China. [5] This is the second attempt to sanction Iran for pursuing uranium enrichment, the first being in December, 2006, with the new sanctions bringing the same response from Tehran as was given in December, namely a renewed promise to never abandon its nuclear program. [6] Despite its defiance of the Security Council, Iran has said that it would only use the technology for peaceful means and would provide guarantees that it would not use the program to develop nuclear weapons. [7]

The stated goal of the sanctions is to pressure Iran into giving up its nuclear development program, but the unstated goal is to marginalize the Iranian regime so that they are perceived by the rest of the world as a dangerous and unpredictable rogue nation. Many people are saying that the new U.N. measures have been very effective in that regard, with the Iranian seizure of 15 British soldiers who had allegedly trespassed into Iranian waters as further proof that it is an untrustworthy and hostile state. [8] Others have said that the most recent sanctions are not even close to being strong enough to achieve the desired outcome, and if the Security Council were really serious about getting Iran to give up its nuclear program, it would hit them where it hurts, in the oil trade. [9]

The United States first leveled sanctions against Iran during the hostage crisis between 1979 and 1981, and continued to tighten restrictions on the country until 1996, when the Iran and Libya Sanctions Act (ILSA) was passed. [10] Over the past ten years, the price of oil has risen from below $20 per barrel to over $60 per barrel, which has boosted the value of Iran’s oil exports by over $30 billion per year. [11] However, while Iran has received a great influx of capital as a result of the recent rise in oil prices, it has reportedly failed to use that advantage to improve the lives of its citizens, with 25% of Iranians continuing to live in poverty. [12] Thus, while harsh oil sanctions would make the situation even worse for Iranian citizens in the short run, it could be the only way to achieve the United States’ real goal of bringing about regime change organically. [13]

There are several reasons why this more drastic approach has not been taken, one of which is that China would never allow it, as they have established a business relationship with Iran that has helped to fuel their massive wave of recent growth, as well as have been able to use Iran, in addition to North Korea, as a way to undermine U.S. policies that may stand in their way. [14] Another major reason is that it would be difficult for the U.S. to prove that Iran has violated the Non-Proliferation Treaty (NPT) it has signed, as the U.S. has lost credibility in terms of presenting evidence of weapons of mass destruction, not to mention the fact that the NPT allows for signatories to pursue nuclear technology for peaceful means so long as they open up their program to IAEA inspectors, which Iran has done. [15]

However, the most important reason to be wary of Iran is the impact that a disruption in the oil markets would have on the global economy. [16] Iran is the world’s fourth largest producer of oil, behind Russia, Saudi Arabia, and the United States, and though it only produces about 2.5 million barrels per day of the roughly 85 million barrels produced and consumed worldwide, the supply and demand situation in the world is so tight that even the slightest imbalance could lead to sharp spikes in the price of petroleum. [17] Further, in the event of a military confrontation, Iran is strategically placed to do even more damage, as it borders the Straight of Hormuz on the north, and could block all traffic attempting to pass through, which would effectively bring the oil trade to its knees, and send prices through the roof. [18]

The exact overall effect on the global economy would be difficult to estimate, but even if the price of oil rose to greater than $100 per barrel, the United States could see its growth slow considerably, while losing ground to Europe, which would suffer as well, but could end up weathering the storm better on the strength of the Euro. [19] Therefore, while the new U.N. sanctions on Iran may not be strong enough to achieve their stated goal of deterring the development of nuclear weapons, they are a targeted strike that sends a message while avoiding the risk of a large-scale confrontation and the exposure of the world economy to the potentially devastating effects of a spike in the price of oil. 

[1] U.N. Security Council takes action against Iran, ASSOCIATED PRESS, March 24, 2007, http://www.msnbc.msn.com/id/17773909/.

[2] Posting of Victor Comras to Counterterrorism Blog, Weak Sanctions on Iran Simply Won’t Work, March 26, 2007, http://counterterrorismblog.org/2007/03/weak_sanctions_on_iran_simply.php (last visited March 26, 2007, 04:45 pm).

[3] Id.

[4] Id.

[5] U.N. Security Council takes action against Iran, ASSOCIATED PRESS, March 24, 2007, http://www.msnbc.msn.com/id/17773909/.

[6] Id.

[7] Id.

[8] Fareed Zakaria, Why Sanctions are Working, NEWSWEEK, April 9, 2007, at 45.

[9] Carne Ross, Could Sanctions Stop Iran?, WASHINGTON POST, March 30, 2006, at A23, available at http://www.washingtonpost.com/wp-dyn/content/article/2006/03/29/AR2006032902003.html.

[10] Jeffrey J. Schott, Economic Sanctions, Oil, and Iran, July 25, 2006, available at http://jec.senate.gov/Documents/Hearings/schotttestimony25jul2006.pdf.

[11] Id.

[12] Lionel Beehner, What Sanctions Mean for Iran’s Economy, May 5, 2006, COUNCIL ON FOREIGN RELATIONS, http://www.cfr.org/publication/10590/what_sanctions_mean_for_irans_economy.html.

[13] Id.

[14] Charles Krauthammer, The Iran Charade, Part II, THE WASHINGTON POST January 18, 2006, at A17, available at http://www.washingtonpost.com/wp-dyn/content/article/2006/01/17/AR2006011700893.html.

[15] Hossein Askari, Boomeranging Sanctions on Iran, NATIONAL INTEREST ONLINE, December 27, 2006, http://www.nationalinterest.org/Article.aspx?id=13234.

[16] Steve Hargreaves, Why Iran matters to oil markets, CNNMONEY.COM, March 28, 2007, http://money.cnn.com/2007/03/28/news/international/iran_oil/index.htm?postversion=2007032815.

[17] Id.

[18] Id.

[19] Stanley Reed, Would $100 Oil Slam the Economy?, BUSINESS WEEK, July 27, 2006, http://www.businessweek.com/globalbiz/content/jul2006/gb20060726_793734.htm?chan=top+news_top+news.

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