Is Iranian Oil Embargo Worth It?

Some of the rapid rise in the West Texas Intermediate oil price from $80 to $110 over the past four months is due to an embargo against the export of crude from Iran, set mostly by the U.S. and EU. Pressure brought by the U.S. also will lower the imports of Iranian crude by Japan and India. It is impossible to say how much of the increase in the price of oil is due to this one action, but it is hard to believe that if the oil embargo were lifted, oil prices would not dive well below $100. Is the embargo on oil the only way to attempt to halt Iran’s nuclear weapons programs?

As oil prices rise above $110, more and more economists say that the drag on the global economy could push several nations back into recession. Among them is the United States. A new recession would cost hundreds of thousands of jobs, if the previous recession is any indication. Tax receipts also would fall, which would increase the deficit. The effect would not be limited to the U.S. The balance of the developed world could expect similar problems.

The U.S. and Europe have set a number of large embargoes over the past several decades. Among the most well-known are the grain embargo against the Soviet Union in 1980. An article in Foreign Affairs published at the time said, “Soviet food supplies have been little affected. U.S. illusions about its own ‘food power’ have been properly dispelled.” Iran continues to export oil now, although it has had to cut prices to spur demand. While the embargo has pushed up oil prices internationally, it may not badly damage the Iranian economy.

The U.S. has had an oil embargo against Cuba for decades. There is no evidence that it has hurt the economy of the island nation. The recent histories of embargoes also includes a weapons move again Venezuela in 2006. That prompted the South American country to threaten to sell weapons to Iran. These anecdotes do not prove that embargoes fail to work. They do say that embargoes are not always effective.

Iran needs much more than the exports of its oil to keep a viable economy. It needs other essentials, such as capital and food. The assets of the Iranian central bank have been locked up in the EU. U.S. banks have been given permission by the government to freeze Iranian accounts. Grain exports to Iran also have been partially blocked. Capital and food are critical to Iran’s ability to keep its own economy from a deep recession. It is still too early to tell if depriving Iran of these assets will buckle its economy, but there are reasonable chances the food and capital sanctions will do significant damage.

The argument about whether the Iran oil embargo is “worth it” will continue, probably until the weapons issue is resolved. In the meantime, the economic cost to developed nations is already extraordinarily bad.

Douglas A. McIntyre