Iran has endured sanctions for decades but 2012 was different. Patience in Washington and Europe was largely spent by the end of 2011, with Israel threatening war, Russia and China resisting new sanctions, and the International Atomic Energy Agency (IAEA) publishing an alarming report in November. Meanwhile, Iran’s controversial nuclear program steadily advanced. Under these circumstances and in spite of a tight oil market, the U.S. and European Union took aim at Iran’s 2.2 million barrels a day (b/d) of crude oil exports. At least 50 percent of the Iranian government’s revenues thus became vulnerable.
On the last day of 2011, President Obama signed new sanctions into law blacklisting any company that purchased Iranian crude without a waiver after June 28; in effect, exiling them and the banks they relied on from the American financial system. In order to qualify for a waiver, Iran’s customers had to reduce imports every 180 days or be granted an exception directly from the White House.
Unlike the U.S., which stopped importing crude from Iran after the Shah fell, the EU purchased about 450,000 b/d from Iran in 2011. But in January 2012, the EU announced that it would boycott Iranian oil completely as of July 1—thus displacing about 20 percent of Iran’s exports. EU members also agreed to cut off insurance for all tankers that carried Iranian crude or petrochemicals. In doing so, the EU denied insurance to 95 percent of the world’s commercial fleet, severely limiting Iran’s options.
Sanctions locked in this summer. Together, these measures crippled Iranian oil exports in July, driving down volumes to lows not seen since the Iran-Iraq War. Exports fell to 930,000 b/d before customers smoothed out new but less than optimal shipping and insurance schemes. Volumes have since settled above one million b/d, still well short of 2011 levels.
It would be a mistake to assume Iran’s most vital industry should have been sanctioned sooner. Any such argument would overlook the incredible risk assumed by the U.S. and EU when pressuring what was—before 2012—the number two producer in OPEC. (Iran now ranks fourth, behind Saudi Arabia, Iraq, and Kuwait.)
It was the EU’s economic ministries that pushed back against calls for an oil boycott leading up to this year. Many felt that crises in the Middle East and supply disruptions elsewhere had already upset oil markets. And given Europe’s dependence on Iranian crude, politicizing the market could backfire—sending prices skyward and European economies into the abyss. Other critics believed sanctions would simply fail: according to this logic, oil once destined for Europe would be sold to Asia instead.
Few realized that American and European sanctions were designed to complement each another and avoid this outcome. New measures were also calculated to gradually reduce Iran’s exports so that world markets could adjust without driving up prices. The EU’s oil boycott displaced nearly a half million barrels every day. The devastating insurance measure, however, prevented other customers from buying up additional cargoes, unless they assumed the risk of coverage offered by unproven Iranian insurers (China and South Korea did so) or sovereign guarantees were offered by importing governments (like Japan). Strengthening this effort, American sanctions made it almost impossible for Asian customers to buy more oil from Iran. Doing so would sever companies and banks from the U.S.
All the while, Europe held out hope that recovering producers like Iraq and Libya, as well as increased output from Saudi Arabia, would keep oil markets well-supplied. To the surprise of many, Libyan oil (1.6 million b/d) returned quickly one year after a revolution halted exports. Iraqi production also increased by 650,000 b/d in 2012. Saudi Arabia, the world’s only market-moving “swing producer,” pumped nearly 10 million b/d for most of 2012—1.5 million b/d more than it averaged in 2011. Oil prices this year only rose when the threat of an Israeli attack introduced a premium to the market. But even that didn’t last long.
Iran’s response was and remains mixed. Oil ministry officials dismiss sanctions, claiming, despite all evidence, that Iran pumps and sells with no problem. Others, however, have been more candid. On December 17, Iran’s Economic Minister, Shamseddin Hosseini, was quoted saying that oil income had been cut in half by sanctions. Speaking to reporters on December 19, President Mahmoud Ahmadinejad said the government was “moving to decrease the share of oil revenues to the minimum as much as possible,” while lawmakers suggested this month that Iran’s budget should assume the country will export only one million b/d in 2013-14.
Sanctions were effective in 2012 if we measure losses in revenue ($3-5 billion every month) and exports (down roughly one million b/d). That much is beyond dispute. Perhaps most surprisingly, the assumptions built into this year’s sanctions proved durable: the market remained well-supplied and prices stabilized just above $100 for most of this year, despite the absence of Iranian crude. Some of Iran’s top customers—like China—may reject sanctions but every one of them reduced crude imports in 2012 and received a waiver from the U.S.
And yet there remains little reason to believe Iran will change its nuclear course soon. More officials might admit that sanctions are hurting Iran’s economy but meetings with the IAEA and negotiations with the P5+1 produced nothing this year. 2013 could still be worse. Iran’s customers in India and Japan are already signaling their willingness to cut imports. U.S. sanctions are set to tighten again in February, exacerbating Iran’s trade deficit by forcing banks to withhold revenues. And most market forecasts hold that rising oil production beyond OPEC will keep pace with the global economy’s modest recovery. Iranian oil will be less essential as a result. Other sectors as well as the country’s currency will suffer accordingly.
Will 2013 be the year of reckoning for the U.S. and Iran? No one knows for sure. But it will certainly be another brutal year for Iran’s economy unless a diplomatic breakthrough is reached.
Photo Credit: David Holt London