EU countries are intensifying efforts to agree an oil boycott and muscular financial sanctions against Iran, which is sizing up the option of shutting down the Hormuz Strait as a response.
On 23 January, EU Foreign Affairs ministers are set to discuss the timeframe for implementing an oil embargo, and possible sanctions against individual members of the Iranian Revolutionary Guard Corps and institutions linked to Teheran’s financial sector.
But the debate is pitting countries such as Italy, Spain and Greece, which account for 68% of the EU’s Iranian oil imports, against richer European nations like France, Britain and Germany.
“There’s such a clear divide in Council between the different member states that put forward proposals for a three months delay and the other member states that originally wanted 12 months, but we are compromising, trying to find a happy medium and we’re getting there,” a diplomat from one EU country told EurActiv.
Reports suggest that France wants an embargo within three months but the EU spokesman Michael Mann would only say that “the precise terms of any new sanctions are still being discussed by the 27 member states and need to be agreed unanimously.”
Other EU sources were more tetchy. “How can you delay something that has not been introduced?” one said. “This is nonsense. The US sanctions come into force in July. It is not like they are instantaneous either. People should get a sense of perspective and reality.”
The expected EU Foreign Affairs Council discussion on 23 January will follow US sanctions, which were imposed on financial institutions trading with Iran’s central bank on 31 December, as the dispute over Iran’s nuclear programme intensified.
Tension in Strait
Iran responded to those sanctions with a counter-threat to close the Strait of Hormuz, through which around 35% of the world’s seaborne crude oil and 20% of the world’s traded oil transits.
The United States has said that any disruption to the waterway would “not be tolerated”.
Tensions grew in January as Iran announced a long-range missile test and began enriching uranium to 20% in an underground bunker, while an Iranian nuclear scientist was assassinated in Teheran.
But European minds have been focusing on the potentially disastrous oil price shock that could accompany any closure of the Hormuz Strait, which would carry such high risks for Iran’s own economy that only a full scale US or Israeli attack had been thought likely to trigger it.
“It is always a possibility and we are working on contingency plans,” an EU diplomat confirmed. “It would be implausible to imagine that any member state hasn’t thought about a contingency plan, but we certainly have.”
If the Strait were closed, “a number of measures have been put forward to placate the markets,” the diplomat added.
On 16 January, oil prices rose to $111 a barrel on fears of a waterway shutdown.
Any closure of Hormuz could cause a “price shock and severe economic downturn,” with oil prices rising above $150 a barrel, the point they reached in 2008 when the world slump began, oil analyst Stephen Schork told EurActiv.
“I don’t think the EU is prepared for a closure, given the lack of growth we are seeing there,” he said on the phone from New York.
“It may be sending a strong message that it won’t back down but it is also vulnerable, because of the currency crisis, and the fact that the ‘PIGS’ buy a lot of Iranian oil.” PIGS refers to Portugal, Italy, Greece and Spain.
Recent comments by the Italian Prime Minister Mario Monti that sanctions should be phased in, possibly over a six-month period, to allow time for arranging alternative supplies, were “sending a signal to the market that Europe lacks cohesiveness,” Schork said.
“The EU is showing signs of playing with a weak hand,” he said.
Italy gets 13% of its imported crude from Iran – as opposed to France’s 3% – and is pushing for a sanctions exemption for its largest oil company Eni SpA.
EU sources say that negotiations are currently trying to clarify whether existing oil import contracts will cease to be applicable in one to two months, or 12 months, before sanctions are agreed.
But even if an EU oil embargo is imposed, some analysts question whether countries such as China, Russia and Turkey would respect it.
EU countries currently buy about 450,000 barrels per day of Iran’s 2.6 million bpd in exports, making the bloc collectively the second largest market for Iranian crude after China.