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The oil weapon: a comparison of oil sanctions and the power of oil

Research paper by: Soran Hussein
2016-05-20 23:28:05

 Introduction: 

When foreign relation policy would not work, countries encounter disagreements. Sanctions and military enforcement are the two usual ways that it has been used. When political disagreements occur, countries often target energy sectors. This is the heart or the engine part. No matter where they are, the sector of natural resources will be target first. It is easier to hit the main income and cut it off. This will affect other sectors such as transportation, military, and aviation. 

Sanction is used as a weapon by countries against others countries for political reasons such as energy Sanctions and financial sanctions. Iranian government experienced many sanctions in the last 50 years. The histories of these sanctions go back to 1979 after the Iranian revolution when Khomeini came to power, they held American diplomats in Tehran; a full trade embargo was set by Americans until 1981. Also, in 1987 Iran had another sanction when they accused of supporting international terrorist groups such as Hezbollah. The most significant one was in 2010 when U.S and European Union set another sanction on Iranian government because of trying to have nuclear power and gradually most of the countries stopped trading with Iran. (Levs)

The compare and contrast of sanctions on Iran and Iraq; portraying its effects:

Iran is the 4th largest country that has 10% of the world’s oil after Venezuela, Saudi Arabia and Canada. During 2008-2009 65% of Iran’s economy was based on oil production. Buyers of Iranian oil include the European Union, China, Japan, South Korea, Turkey, South Africa, Malaysia, Sri Lanka, Taiwan, and Singapore. In 2011, Iran sold approximately about 2.505 million barrels/day and the European Union was in the top of the buyers with almost 600.000 b/d. (Samore)

buyer of Iranian oil Average Pre-Sanctions 2011 Average Post (2014-present) Percent change 

 European Union 600,000 Negligible -100% 

 China 550,000 410,000 -25% 

  Japan 325,000 190,000 -40% 

  India 320,000 190,000 -40% 

South Korea 230,000 130,000 -40% 

 Turkey 200,000 120,000 -40% 

South Africa 80,000 0 -100% 

 Malaysia 55,000 0 -100% 

 Sri Lanka 35,000 Negligible -100% 

 Taiwan 35,000 10,000 -70% 

Singapore 20,000 0 -100% 

Other 55,000 Negligible -100% 

 Total 2.505 million 1.057 million -60% 

There are many differences yet similarities; if Iraq and Iran were to be viewed in terms of post sanctions and pre sanctions. To being with a sanction is basically a penalty for disobeying a law or rule. When it comes to talking about Iraq and the post sanctions on it one can start pointing out of the fact that Iraq started facing sanctions after its invasion of Kuwait. As a result of the invasion the United Nations Security Council came to the point of imposing sanctions on Iraq, in order for Iraq to withdraw from Kuwait. Not only aiming of withdrawal but also the fact that they even wanted Iraq to pay reparations which is the aim of making up for any damage caused which in this case comes to paying for the damages Iraq caused from the invasion of Kuwait.  

Furthermore, Iraq had to disclose and eliminate any weapon that could cause further damage in the future. The incentive they gave Iraq to eliminate any weapons was to make sure that there will be no terrorist movements in any time or condition. Which resulted in the sanctions put on Iraq trade started to diminish which if taken into concentration having trade banned then Iraq can no longer benefit from having more valuable things and the fact of getting the chance to improve its economy as trade plays a big role when it comes to having a better economy. Iraq was not only banned from trade but also from any financial resources except for medical resources.in general the result of having any sanction on Iraq there were disadvantages than in fact any advantages. Iraq’s army started to diminish which meant that security and protection started to decrease. After the gulf war and the sanctions put on them Iraq was no way able to rebuild and recover properly. Moreover, another huge result was how imports and exports started to be banned. Which of course meant that development of technology was more of a hard aim to be achieved than it was before, though not only technology but also many other materials.

 Now coming to talk about the post sanction era of Iran, Iran just in common with Iraq and many other countries it had faced many disadvantages rather than any advantages from sanctions put on them. By having the United States forcing sanctions on Iran the economy of it started to get worse. In the first place sanctions were placed on Iran as a result of their continuous engagement in illicit nuclear activities. And that the main aim was to prevent them from any other engagement of any nuclear activity that could be possibly happening in the future. Having sanctions Iran started to face a decline in its export from oil products. Not only that but also the fact of how those sanctions made Iran face a difficulty in the usage of the Iranian nuclear program as for now specialized materials were needed which they couldn’t provide no longer because of the sanctions they had on them. 

Not only were they affected in terms of economy but also in term in social estates too. As they started to loose many trading partners having left with only china as the largest of its trading partners. Furthermore, Iran no longer had access to products needed for the oil and energy sectors. Which resulted in many companies withdrawing from investing in Iran and it also caused the decline in oil production. Now if we compare Iran and Iraq, we can see that both countries had a difficulty in accessing any technological innovations which of course it all goes back to the sanctions they had on them. 

To begin with before putting sanction on Iran and Iraq, both countries managed to face many developments in terms of economy, politic, and social estate. For instance, before having sanctions Iran had one of the most important positions in the global market. Iran has an important position in oil market and not only that but also the fact that by being able to sell this huge amount of oil and having such a position it had the advantage of having many economic benefits. Many trading companies there for where attracted to Iran leading to an increase not only imports but also exports. Moreover, Iran was one of the founders of OPEC in 1965 which then bring us back to the fact that Iran provided 13% of OPEC’s oil which was 80% of the global market. Now as we know Iran for a period of time was engaged in many illicit nuclear activities that helped it in many wars against its neighboring enemies. Furthermore, being committed in nuclear activates Iran had the advantage of having several sources of energy. Another fact about Iran’s economy before sanctions was a petro-state which meant it depended on oil mostly as almost 65% of Iranian economy was based on oil production which leads to the discouragement of other sectors such as agriculture. Being highly dependent on oil during the pre-sanction era Iran in terms of economy was effected a lot. In addition, Buyers of Iranian oil includes European Union, China, Japan, South Korea, Turkey, South Africa, Malaysia, Sri Lanka, Taiwan, and Singapore.

 In 2011, Iran sold approximately about 2.505 million barrels/day and European Union were in the top of the buyers with almost 600.000 b/d. another advantage of not having sanctions, Iran had many foreign direct investments which meant more employment also more public services that all lead to have a more powerful position. Having less rebellions which helped the government in two conditions. One was getting more votes as for satisfying the needs of the public, and the second condition was that the government was able to tax on either income or interest rate.

 When it comes to talking about Iraq, before having sanctions, it managed to benefit from natural resources such as oil. By having oil, in common with Iran it got many foreign investments which again lead to having an increase or development in the standard of living employment and social status. Another fact is as mentioned, “Iraq has the world’s second largest proven oil reserves. (Jooml, 2005) 

In Iraq before the sanctions only 12.5% of the income came from agriculture and 7.8% from other industries. That is the reason why the sanctions had a lot of affect. In 1990 Iraq's population was 18.9 million 71% of that population lived in cities and 80% of that worked in government sectors. Before the 1990's Iraq had the highest standers of living in the Middle East especially Baghdad was on top of that standardization. Most importantly 90% of the population had access to modern, height quality healthcare which was free. During the sanctions that health car was barely function. There was also a height level of education, 93.9% of Iraqi children were enrolled primary school. Almost all of the populations had access to safe distributed water. Education in Iraq was that good that the Arab cities around it came there to be educated especially college education. 

The reason for that height education was the increase in the price of oil in the 1970s. Even before the sanction Iraq's economy had a steady declined, the reason was the 1980s war Iran. Per capital Gross Domestic Product (GDP) if Iraq rose up by $3, 812 between the 70s and 80s, then dropped to around $250. Iraq's GDP dropped to the lowest rate in 1994, which was $180. Life expedience was also declining; it was 65 years in the 80's and become 58.2 years by 2006. The violence in the region may had a factor of this, but the poor quality of the medical services was the main factor that was caused by the violence. The number of depth of the 70's and 80's before the sanctions was 50 deaths per 1,000 births, but during the sanctions that number doubled to 101 deaths per 1,000 births. Almost all the sanctions worst during the sanctions than after the sanctions, but the economy. Iraq after the sanctions became much more dependent on oil than ever before.

Do sanctions affect oil volatility? If so, what factors of oil volatility get altered or diversified? 

Oil volatility is when the prices of oil are accustomed to a certain fluctuation in oil prices. Volatility can be affected by certain criteria of the economy. “Some specific aspects that effect oil volatility are: 1. Standardization of products, (such as vehicles, machines, and devices etc.) that we use on a daily basis that are dependent upon oil whether or not it is available. 2. Managing abundance: the supply is failing to meet demand. 3. Shutting oil in: in which the amount of oil that is put on the market is due to the result of control and organization of the distribution of oil. 4. Oil markets and shifts in pricing power: this topic relates back to the influence petro states have on oil prices which in turn affects oil volatility and the global oil market” (Bridge and Le Billion ). An example would be if Saudi Arabia was to alter oil prices then the rest of the petro-states would have to adjust accordingly thereby influencing the oil prices. While trying to determine whether sanctions do affect oil volatility, looking at specific examples from Iran and Iraq is what will help determine an appropriate conclusion. At this current moment in 2016 oil prices are at some of its lowest points going as cheap as 30 dollars per barrel. Accompanying this decrease in oil prices are the demands of oil which are not meeting critical output along with the sanctions of Iran that has been lifted by the United Nations.  As the sanctions on Iran get lifted they are preparing themselves for the oil market. 

However, as they are getting ready to export oil, being a petro state means that Iran will immensely affect the global oil market. “Crude prices have been tanking for months, dropping to below $30 a barrel. A flood of new oil from Iran will likely push them even lower very soon…. Tehran is in a tricky position. The more oil it exports, the more likely prices will drop even more.” (Kottasova) As oil prices are well below average an even greater addition of oil supply on the market will help further impact the decline of oil prices in the market. Another aspect that will significantly contribute to the oil market is Iran’s storage of oil. “They have approximately 30 million barrels of oil in storage”.

The sanctions have currently been lifted off of Iran. As they have had time to recuperate their resources and further strategize themselves which will have an immense effect to oil aspects and enterprises. The global industry of oil having put out an abundance of oil as it is has vastly impacted the market, nonetheless now that sanctions on a petro state as huge as Iran has been lifted they have been given an opportunity to start exporting again. Hence, Sanctions have a consequential and suggestive effect on oil volatility.  

The oil weapon: Can oil be used as a weapon against an exporter of oil?

Oil is a powerful commodity and resource to have; it enters with numerous benefits and consequences. One of those consequences is that this influential resource has the ability to be used against the country it’s coming out of.  A specific way of this happening is through the imposition of sanctions upon one’s country. If a territory is to be dependent on the exporting of oil for its economy then sanctions will first, deplete the country’s economy and oil volatility because oil dependent machinery will be reduced and that major out flow of the abundance of oil will no longer be there. Second, it will also affect the global oil market due to its significant withdrawal from its part of the oil industry. As seen above yes oil can be used as a weapon against petro states and one significant example would be Iran. 

Iran’s involvement in nuclear power, lead to the infliction of significant sanctions upon the country. “The ban was related to several products/goods. Among these were the oil transactions, which prevented any trading of Iranian oil……. Oil exports fell by 60% from 2.5 million barrels per day in 2011 to 1.1 million barrels per day in 2013”. “The country’s currency also experienced a significant depreciation. On the unofficial market, the rial dropped by 56%” (Tatar and Sterjnborg). Here we can see that all aspects of the Iranian economy were altered and started fluctuating as soon as the sanctions were imposed. This demonstrates how oil can be a true curse and that one’s economy should not be dependent on one particular resource whose value has the ability to climb or decline over night. 

The first time oil was used as a blunt instrument was in 1973. In 1973, when Arab countries saw themselves defeated against Israel, they tried to use oil as a weapon in order to punish those who either supported Israel or did not support the Arabs. Saudi Arabia was the first one to announce immediate cuts in oil production. Producers could influence and affect the oil price according to their production. So, if they reduce oil production, oil price will rise. Oil price will increase in the international market when supply is reduced and demand is increased. 

Other Arabian Gulf countries threatened the supporters of the Israelis too. This event did not end only with threatening the West, but also it resulted in an increase of 70 percent of oil price. (Mabro) This history may help us understand if this technique is useful today. Can oil be used as weapon today? 

The recent oil crisis in the Middle-East caused a huge reduction of oil price. Saudi Arabia was one of the first countries threatening to cut the oil production; however, they would not do the same thing now. Cutting oil production is one thing, and reallocating oil imports is another thing. Simply, cutting oil production can affect everyone. As Marbo says, it can affect your allies and friendly countries. 

Basically, cuts in any production can cause an increase of price of that product. That is exactly happened in 1970. The embargo affected the whole world and the global market. This can damage friendly developing countries, including importers and exporters. A country like Iraq cannot afford to lose money by cutting production. A reduction of oil production was not only a shock to the West, but it was shock to oil exporting countries too. They realized how dependent they are on oil. And a country a poor non-oil developing country will find another alternative to get to cheaper oil. This is another reason why oil cannot be used as a blunt instrument today. The oil market is bigger than 1970s. Countries will find other alternatives to buy their oil. Now there are many buyers and sellers. This is one of the reasons that sanction on Iran worked partially. Iran had other consumers in the market. Sanctions and embargoing countries will only affect the global price of oil. 

There different reasons why countries go under sanctions. Iraq was sanctioned because of Kuwaiti War. Iraq invaded Kuwait and international organizations like the United Nations condemned this act. They targeted energy, economy, and military sectors. Basically, they cut off Iraq from the rest of the world. The same thing happened in Iran when the nuclear program initiated. Both Iran and Iraq could not trade with other countries and international organizations. The US and the UN forbid nations and organizations to trade with Iraq and Iran. This is why importers and international oil companies would not trade with these countries anymore.

Overall perspective and conclusion:

Throughout our research we found that oil has the complete power to become a weapon. Once this happens the exporter of oil becomes the dominant target, which leads to highly consequential effects. As oil can be considered a privilege an abundance and abuse of this resource is what causes it to become a weapon, which can be used for or against oil petro states depending on according circumstances.  When using it against it would be to impose sanctions in which petro states would abruptly witness a decline in their economy.  If one was to use this weapon for benefits they would do so by trying to control oil volatility on the global market thereby creating short term yet quick advancement and control. 

 

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