Following recent reports from the International Atomic Energy Agency outlining Iran's ramping up of its nuclear program and the November 2011 attack on the British Embassy in Tehran, the European Union has threatened an oil embargo against Iran. The EU accounts for approximately 450,000 of Iran's total of 2.6 million barrels of crude oil exported daily. Iran's foreign ministry has warned that such an embargo would result in the immediate jump in the price of crude oil to $250 a barrel, up from its current $114.

TUTORIAL: Commodities




The Possibilities

Iran is the third largest oil producer in the world and an integral OPEC producer. OPEC as an organization will face a dilemma if the EU embargo takes place. It can do one of two things: boost oil exports from other OPEC producers to cover the shortfall and stabilize prices, or allow a shortage and have prices skyrocket. It is a political decision as much as an economic one. (Want to know more about the Organization of Petroleum Exporting Countries? Read Meet OPEC, Manager Of Oil Wealth.)

If other OPEC countries rush in to dam the shortfall, it will be seen by Iran as support for the EU and could cause further conflict in the organization and the Middle East in general. On the other hand, if overall production is not increased and prices rise precipitously, OPEC runs the risk of tipping Western countries over the edge into developing more efficient and domestic sources of energy.

1973 U.S. Embargo


OPEC has seen the impact of such an embargo before. In Oct. 1973, the organization along with Egypt, Tunisia and Syria, declared an oil embargo against the United States and several other Western countries. The declaration was a reaction to the United States' role in supplying arms to Israel and the other countries' foreign policies with regards to the Israeli conflict. The price of crude quadrupled within the space of a few months and the United States suffered one of the worst energy shortages in its history. This "oil weapon" was quickly effective, changing America's role in the Middle East and brokering peace deals.

What OPEC had not expected was the long-term impact of the embargo. The disruption of cheap oil threw the U.S. into recession and impacted almost every industry. Japanese automakers saw an opportunity to begin to make small, fuel-efficient cars for the U.S. market and a permanent reduction in oil usage began as a result of this conflict. The U.S. put resources into finding and developing domestic oil reserves and its reliance on Middle Eastern oil dropped. OPEC stands to lose even more oil exports in the future, if it allows shortages to occur.

What's Next?

Where does this leave Iran? It has no option but to hope that an embargo does not happen and, if it does, that fellow OPEC members won't jump in to restore the flow of oil. According to the Iranian foreign minister, Saudi Arabia has already confirmed that they will not increase production. There are few OPEC countries that would even have the capacity to ramp up production so quickly. Iran will have to hope that the economic instability an embargo would cause in the EU and the United States will end quickly, before it impacts Iran.

The Bottom Line
A European Union embargo on Iranian oil would hurt the economies of both sides. It is also likely to increase conflict within OPEC's membership and raise tensions in the Middle East. Because of Europe's dependence on Middle Eastern oil, an embargo, if it occurs at all, is likely to be short-lived and will not accomplish the changes in Iran's foreign policies that the EU is hoping to achieve. (For more, read A Guide To Investing In Oil Markets, Peak Oil: What To Do When The Well Runs Dry, and Uncovering Oil And Gas Futures.)


Related Articles
  1. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  2. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  3. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  5. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  6. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  8. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  9. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  10. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
RELATED TERMS
  1. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  2. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  3. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  4. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  5. Sprexit

    Sprexit, or SPanish euRo exit, is the possible case of Spain ...
  6. European Economic and Monetary ...

    The successor to the European Monetary System (EMS), the combination ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  4. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  5. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  6. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!