Will New U.S. Sanctions On Iran Cost The President His Job?

By: Juan Cole   Date: 5 January 2012

About The Author

Juan Cole

Richard P. Mitchell Collegiate Professor of History at the University of Michigan.

Juan Cole, EconomyWatch Contributor

 

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Tensions are high between the West and Iran. Over the weekend, United States President Barack Obama imposed new financial sanctions that would directly affect Iran’s oil export market. Very swiftly, the European Union announced that it will ban the import of all Iranian crude, a big blow to Iran since that represents almost 20 percent of its export market. How will Iran react, and what implications does this have for the oil market, and geopolitical security?

Will New Us Sanctions On Iran Cost The President His Job?

Will Obama’s Sanctions Address The Issue With Iran?
Photo Credit: The White House

A sharp drop in the value of the Iranian currency as a result of new American sanctions may sound like good news to hawks in the US. But actually this development may signal ways in which Americans will also be harmed, and Obama may have put a second term in jeopardy, cutting off his nose to spite his face.

An amendment to the National Defense Authorization Act signed by President Obama this past weekend will seek to slap third party sanctions on countries and enterprises that deal with Iran’s central bank. It will go into effect this summer. In effect, the law says that if you buy Iranian petroleum, you cannot do business with American financial institutions. Since the United States is still over a fifth of the world economy, and most institutions with capital need to deal with it, the hope of Congress is that Iran will be left without customers.

The measure, pushed by the American Israel Public Affairs Committee on behalf of the government of Israeli Prime Minister Binyamin Netanyahu, might well be a trap for Obama. In an election year, he could not refuse to endorse new sanctions against Iran (the Republican candidates in Iowa are practically running on promising that if elected they will launch a war on Iran; and they are lambasting the president as weak on this issue).

Related: Iran Will Block “World’s Most Important Oil Chokepoint” If Sanctions Are Imposed

Related: Oil Crosses $100 On First Trading Day of 2012

But the new sanctions may well hurt Obama’s own election chances. Iran’s military exercises in the Persian Gulf, aimed at reminding the world that it can play the spoiler and stop one-sixth of the world’s petroleum from reaching the market, helped put Brent crude up to $108 a barrel, a spike helped along as well by news of a jump in Chinese manufacturing.

Those two factors, the likelihood of rising Asian demand for petroleum in 2012, and investor nervousness about how tensions with Iran will play out, will probably keep petroleum prices at historically high levels in 2012, and some analysts believe that there could be a return to the overheated pricing of 2008 before the crash.

It would be much better for the American economy if prices sank back down to the levels of only a few years ago, of $50 a barrel or less.

If the Congressional sanctions actually worked, and took Iran’s roughly 2.5 million barrels a day in exports off the world market, that would take out 80% of Iran’s export income and deeply hurt the regime. But it would also send world petroleum prices through the stratosphere, deeply harming Western economies already teetering on the edge.

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Related: Iran’s Currency Plunge 10% After Fresh US Sanctions

Actually, I have to wonder whether the fall in the value of the Iranian currency might not even be good for the country. Nations with pricey primary commodities such as petroleum suffer an artificially hardened currency. In turn, that makes it expensive for outsiders to buy what they make, leading to stagnating industry. Softening the currency should help Iranian exports, a key element of the economy. Iran has had a crash program to expand its non-oil exports, with some success.

Obama cannot hope for decisive help from the only quarter able to offer it in the short term, Saudi Arabia. The Saudis were willing, in the late 1970s, to flood the petroleum markets with their excess capacity for political gain. But Riyadh now no longer wants inexpensive petroleum, because the king is using extra petroleum receipts to bribe the Saudi population into repudiating any “Arab Spring” inside the kingdom. The Saudi government has expanded subsidies so much, in a quest to mollify a formerly angry public, that it probably cannot afford them if prices fall too much. Hence, the Saudis cannot pull Obama’s bacon out of the fire, though they could try to blunt the force of the crisis by pumping an extra million barrels a day or so.

Related: Iran Warns West: Ban Our Oil And Prices WIll Rise Above $250

Moreover, the sanctions on those who deal with Iran’s central bank threaten profound harm to the economies of American allies. South Korea is deeply worried about their impact and will seek an exemption. South Korea imports roughly $11 billion a year of petroleum and other products from Iran and sells Iran $6 billion worth of South Korean manufactures– automobiles, etc. If Seoul cannot buy Iranian petroleum (some 10 percent of its oil imports), that would hurt its economy. If it cannot receive payment from Iran for Hyundais and other exports, that would hurt its economy. In short, some $16 billion a year in trade is at stake for South Korea. That is about 5% of its external trade, a significant hit. And, energy is not like just any other import– it is foundational. In a world where petroleum supplies are already tight, it will not be easy or maybe even possible for all of Iran’s former customers (should they cut Iran off as the US Congress urges) to make up the shortfall from other sources.

Related: Iran Export, Import, & Trade

Related: Iran Economy


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