For months, various pundits, oil experts and Iranian regime officials warned that an embargo on Iranian oil exports by the U.S., EU and others would precipitate a catastrophic shock to oil prices worldwide. This mantra has led many to oppose the complete sanctioning of Iran's oil industry and full enforcement of robust sanctions against Iran. Yet real-world developments have shown this conventional wisdom to be off-base: the truth is that the world's oil markets can withstand a full embargo of Iranian oil, particularly right now.
The numbers prove it. Since the end of 2011, Iran's oil exports have been cut in half, falling by one-and-a-half million barrels per day as customers seek new sources of oil in the face of intensifying U.S. and EU sanctions. If the pundits were correct, the removal of this Iranian supply should have unnerved oil markets and sent oil prices surging. In fact, the opposite has been true. Oil prices recently hit an eighteen-month low.
How is this possible? The standard line on oil is that any disruption of supply from Persian Gulf countries will lead to devastating price spikes. Yet in reality, today's global markets are more resistant to shocks than the pundits would have us believe. Although Iran is regularly touted as an oil powerhouse, consider that its exports - which have recently fallen to as low as one million barrels per day - actually make up a small, replaceable, part of the more than 80 million barrels of oil consumed globally every day.
The expansion of oil production and exports in other parts of the Middle East are making up for the loss of Iranian oil. Saudi Arabia, for one, is utilizing its spare capacity to increase its output to record levels, while Iraq's oil industry is undergoing a resurgence with production now higher than Iran at nearly 3 million barrels per day. Libya has also achieved a near total recovery of its oil production since the end of its recent conflict.
These developments, as well as the overall global economic slowdown and the widespread international disapproval of Iran's illicit nuclear program, have led to a decrease in demand for Iranian oil. In this environment of weakening industrial demand and increased global oil supplies, traditional purchasers of Iranian oil are finding alternative suppliers, including even China.
The data conclusively shows that the world should not fear the continued reduction - or even the complete removal - of Iranian crude from the global oil market. Global markets have survived shocks of greater magnitude over the past 10 years, including the loss of production from Iraq during the Second Gulf War, Venezuela during the general strike of 2002-03 and Libya during its recent armed conflict. These events should have taught us that supply losses do not necessarily translate to consequential price shocks, a lesson seemingly lost on the so-called experts.
It is also clear that sanctions are having a profound impact on Iran by precipitating its return to the negotiating table. The regime is openly seeking sanctions relief, making this the optimal time to exhaust all the leverage we have to end Iran's illegal nuclear enrichment.
At this critical moment, the EU and U.S. must fully implement and enforce sanctions. President Obama must ensure that all importers of Iranian crude continue to significantly cut - and ultimately cease - their crude imports from Iran. Japan and South Korea have demonstrated the practical prospect of doing so by ceasing their imports of Iranian oil in July, after respectively having been Iran's second and fourth largest national oil markets. China, India and others should do the same.
Furthermore, as countries discontinue their imports of Iranian crude, certain financial channels unaffected by sanctions should be severed. For example, not all Iranian financial institutions are sanctioned and not all areas of banking and other payment settlement activity in Iran are prohibited, largely to allow for certain countries to make (increasingly limited) payments for Iranian oil. As imports of Iranian crude dissipate, these conduits for payment should be eliminated as well. All Iranian financial institutions should be sanctioned and no limit placed on the areas of prohibited banking activity, including barter arrangements.
Now is not the time for half measures or needle-threading. By pushing the remaining million barrels of Iranian oil exports off the global market and imposing a complete economic blockade of Iran, the international community can succeed in extracting real concessions from the regime on its illicit nuclear program. The reality is that the regime can survive without its nuclear program, but not without its economy, and world powers must force Ayatollah Khamenei and Mahmoud Ahmadinejad to make that choice. Squandering this opportunity could mean a nuclear Iran in a volatile Middle East, a scenario we must do whatever it takes to prevent.