Iran showed strong responses against Western sanctions. Iranian officials claimed that Europe must be punished for its provocative behavior. Teheran threatened to close the Strait of Hormuz, and is considering taking proactive measures such as stopping the export of crude oil to Europe to strike the European economy.
The domestic situation in Iran also may make the whole situation get out of control. On the one hand, the current Iranian administration is possibly using its confrontation against the West to cover domestic economic problems and political fights. On the other hand, supporters of Iranian President Mahmoud Ahmadinejad and loyalists of Iran's Supreme Leader Ayatollah Seyyed Ali Khamenei are engaged in a heated competition. They argue about which one of the two leaders can best represent the Islamic Revolution's ideals and how to secure the Iranian administration under growing international pressure. Western sanctions have intensified disputes between different factions in Iran. The Iranian Government's ability to control the country has decreased because of internal political fights. As a result, Iran has resorted to imprudent actions, such as attacks on the British Embassy in Tehran in November 2011, actions that have sharpened conflicts between Iran and the West.
Confrontation between Iran and the West has caused worries in the international community about energy security. The cut-off of Iran's oil exports will damage Asia's and Europe's energy supply. Being an important energy producer, Iran has at least 93 billion barrels of oil reserves, taking up 10 percent of the world's total and ranking fifth worldwide. Its daily oil production capacity is 4.1 million barrels, half of which is sold to global oil markets, making the country the world's second biggest crude oil exporter.
The EU is Iran's second biggest oil importer. Every day, it buys about 600,000 barrels of oil from Iran, of which Greece shares 25 percent, Italy 13 percent, and Spain 10 percent. Asia imports about two thirds of Iran's crude oil and condensate oil exports. Oil from Iran accounts for 10 percent of Japan's oil imports, 8.3 percent of South Korea's, 11 percent of China's and 12 percent of India's.
If Iran's oil exports are terminated, the world's daily oil supply will drop about 2.3 percent. And oil-importing countries in Europe and Asia would have a hard time finding an alternative supplier any time soon. For example, South Korea imports crude oil from Iran at a price of $102.89 per barrel, which is lower than the prices of the United Arab Emirates, Saudi Arabia and Kuwait. If South Korea turns to another oil supplier, its oil refineries will face a loss of tens of millions dollars annually.
The Strait of Hormuz is an important oil transportation passage in the world. One third of global ocean oil shipping is conducted through the strait, including three quarters of Asia's oil imports. If Iran shuts the strait down, global energy supply will be heavily impacted.
Growing energy supply and transportation risks inevitably provoke fluctuations in oil prices. Light sweet crude for delivery in March increased $1.25 to $99.58 a barrel at the New York Mercantile Exchange, up about 1.3 percent on January 23 after the EU declared its new oil embargo on Iran. Brent crude oil futures for delivery in March at the International Petroleum Exchange in London grew 0.66 percent to $110.58 that day.
Analysts foresee that an escalation in the confrontation between Iran and the West will cause chaos in the international energy market, with consequences more devastating than the turmoil in the West Asia and North Africa in early 2011. Crude oil prices might surpass $200 a barrel.
The EU's oil embargo against Iran is not good news for the European economy, which has remained weak since the 2008 global financial crisis. The EU set the embargo deadline on July 1 to give Greece, Italy and Spain enough time to find other suppliers, because the three import most of their oil from Iran. If Iran seizes this "weak point" and cuts off its oil supply to the three nations in advance, the economies of the three nations could collapse. Also, Japan and South Korea are negotiating with Washington and asking to be exempted from Iran oil sanctions to keep their economies from being influenced.
Oil price turbulence triggered by the confrontation could slow down the world's economic recovery. Deutsche Bank predicted that if international oil prices can maintain current levels, the global economy will post a growth of 3-3.5 percent in 2012. If oil prices grow to $125 a barrel, the global economic growth rate will decrease to 2.5 percent. If oil prices rush to $150 a barrel, the world economy will face disastrous consequences.
Escalating confrontation between Iran and the West will not only hurt both sides, but also cause more turbulence to regional security and deteriorate the sour world economy.
The author is an assistant research fellow with the China Institute of International Studies
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