This fruitless US confrontation with Iran will backfire

The US has come up with a curious strategy for sanctions on Iran that seems designed to reward America's strategic rivals China and Russia, punish its allies and drive up global oil prices.

epa02552481 A general view of the South Pars gas field near the southern Iranian port of Assalouyeh, Iran on 27 January 2011. Iranian Oil Minister Masoud Mirkazemi recently said that Iran has found a new shore gas field in Southern part of Iran. The value of the field is being estimated at around 50 billion US dollars, he added. EPA/ABEDIN TAHERKENAREH *** Local Caption *** 02552481.jpgShow less

The US has come up with a curious strategy for sanctions on Iran that seems designed simultaneously to reward America's strategic rivals China and Russia, to punish its allies and to drive up global oil prices.

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Washington expanded sanctions on companies supplying goods or services to the Iranian oil and gas industry. Britain and Canada blocked their financial institutions from doing business with Iran, including its central bank. South Korea announced it was thinking of banning Iranian petrochemical imports, but not crude oil.

On Thursday, the French foreign ministry announced plans for a unilateral ban on oil imports from Iran, before revising its position to support an EU-wide embargo. William Hague, the UK foreign secretary, is said to be "ideologically behind" the French plan.

These latest moves may have been inspired by the apparent success of oil sanctions on Syria, imposed over the brutal crackdown on protesters. Syria has now stopped paying its major foreign operators Shell and Total, and production has fallen.

But Syria is a different case to Iran - it is a much smaller exporter, whose heavy, high-sulphur crude requires specialised refineries. Syria is reported to have failed to strike deals with India, Malaysia and Indonesia to buy its oil, suggesting potential sanctions-busters do not see much recompense for taking on the political and financial hassles.

However, last Wednesday, an Iranian ship was reported to have loaded Syrian oil, presumably for export to a third party, and as part of an Iranian attempt to help its ally. And the cut-off of oil exports is yet to yield any noticeable improvement in Damascus' behaviour.

So far, the US has backed away from imposing sanctions on Iran's central bank - advocated by Benjamin Netanyahu, the Israeli prime minister, and seen by some as tantamount to economic warfare, likely to lead to a complete halt of oil sales.

One of two scenarios may therefore unfold. In the first, even toughened sanctions are ineffective in harming Iran.

The Iranians, who have previously rejected the idea of barter transactions with China and India, could resurrect that idea. Through front companies, smuggling and deals with Chinese entities not exposed to the US financial system, exports can continue.

Given time, Iran could send some oil via Iraq - a tactic almost impossible to police.

This outcome illustrates the generally accepted principle that oil trades in a global market in which a change in supply or demand in a single region affects all buyers and sellers equally. If Iran has to discount its crude to secure sales, China gains, probably on the order of a few dollars per barrel. The Chinese are thus rewarded for perpetuating a US-Iran stalemate.

More broadly, the multilateral trading system championed by the US since the end of the Cold War suffers another blow, in favour of China's mercantilist model of state-to-state dealings.

And Iranian leaders, having survived yet another round of punitive sanctions, would be emboldened.

In the second scenario, sanctions succeed in severely reducing Iran's oil exports.

The loss of up to 1.5 million barrels per day could just barely be covered by Saudi Arabia's spare capacity. That tightness would inevitably push up prices further, and leave very little safety margin in the event of disruptions elsewhere. That is just what is needed to push the US economy into a renewed recession ahead of the attempt by Barack Obama, the US president, to attempt to win re-election next November.

The European oil market is particularly vulnerable. The now-sanctioned supplies from Syria went previously mainly to Italy, France and the Netherlands. Libya's high-quality oil production, almost all directed to Europe, is returning faster than expected but is still a million barrels per day below pre-civil war levels. Greece and the other southern euro-zone countries, already staring into the financial abyss, might suffer as their refineries are unable to secure suitable crude-oil grades.

These sanctions therefore really have no good outcome for the US. Either they fail, or they hurt America and its allies.

Intensified rhetoric, whether from Tehran, Tel Aviv or Washington, stirs fears of crisis and pushes up oil prices. As long as Iran's oil exports are not seriously affected, it probably gains more in the "fear premium" than it loses in increased transaction costs. Russia, another strategic competitor to the US, gains both from the current mini-Cold War, and if a hot war does break out.

All these questions on the technical efficacy of sanctions are, of course, secondary to their impotence as tools of policy. Iranian policymakers are unlikely to be swayed by even severe economic damage, sanctions hurt ordinary people while empowering the regime's most hardline elements, and it is unlikely that Tehran can offer any concessions that will satisfy Washington.

Presumably US policymakers are well-aware of all these issues, suggesting that the latest round of sanctions is intended to provide the White House with political cover against accusations that it is "soft" on Iran.

But the really tough policy would be one that goes against the prevailing wind of fruitless confrontation.

*Robin Mills is the author of The Myth of the Oil Crisis and Capturing Carbon

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