After nearly a decade of hearing the same back and forth between Iran and the West, the situation has heated up as the US and the EU look to clamp down on Iran's oil revenue. Tough talk from the Bush Administration for years amounted to sanctions that Iran was largely able to ignore; the routine newsroom joke during that period was that Washington was blocking imports of Iranian dates, prunes and carpets. This time it's for real, this time it's oil.
All over the newswires I read that Iran is in panic, people are lining up to buy dollars, and the currency is collapsing with the threat of the new sanctions. But I'm still confused at how the mechanics of this would work in the long run, because not everybody is on board. China, which is a major buyer of Iranian oil, has already blown off the sanctions. Russia, which is a major oil exporter and therefore not a buyer of Iran's crude, is using its diplomatic clout to warn against the sanctions and is now raising the specter of potential war by Western powers.
The issue here is that oil is a global market. If one country, or group of countries, decides not to buy from a particular seller, that simply rearranges the way the oil is traded but does not affect either the production or the consumption -- and therefore the supply and demand -- of the product in question. This came up over and over when Venezuela's President Hugo Chavez repeatedly threatened over the years to cut off oil exports to the United States. His detractors pointed out that that would just mean Venezuelan oil would go to another country, displacing the oil that country was buying from Saudia Arabia, Indonesia, or Libya, which would in turn end up in the United States.
The same thing strikes me as happening here. The US, EU and Japan all band together and put their foot down about Iranian oil, and start to buy it from somewhere else. OK, that in the short term will make the price of oil go up because of the uncertainties involved, bringing speculators into the mix, and at least temporarily roiling the markets. The logical next step would be for China to simply increase its purchases, some of which it can do through barter exchange (oil for ipods?) and absorb the slack. If the fundamentals remain the same, the prices would go back down, with a system that's probably less efficient because it would have to be based on politics rather than the geography.
At the same time, both the EU and Japan are seeking to get three to six-month wavers to give them time to figure out where to buy oil and petrochemicals. Makes sense. But would it not also stand to reason that Iran could use that three to six month window to figure other places they could sell their oil?
The only obvious effect I see would be giving the Chinese a buyer's monopoly (or monopsony in fancy econ-talk) over Iranian crude. They are already negotiating pretty steep discounts from Tehran. Helping the Chinese get cheaper oil seems like a bizarre way for Europe, the US and Japan to halt Iran's nuclear program. But I would wonder how long even that can last. And I would guess there are plenty of small African or Eastern European countries that the big powers pay scant attention to that would be happy to start taking some cargoes from Iran under the table. China wouldn't be the only buyer, at least not for long.
Something doesn't add up here ...
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