“U.S. and EU sanctions on Iran’s crude oil exports and its central bank were not supposed to affect either the volume of oil available or its price, provided markets reacted ‘rationally,’” Reuters analyst John Kemp reported this week.
Who didn’t suppose this? A biased party: the “sanctions advocates at the Foundation for Defense of Democracies in Washington” in a report called “Oil Market Impact of Sanctions Against the Central Bank of Iran.”
This was not mere academic theorizing on their part. Decisions hinged on what the sanctions advocates at the Foundation for Defense of Democracies “supposed.” Writes Kemp, “The idea that sanctions could reduce Iran’s oil revenues without boosting prices for oil-consuming countries was crucial to persuading policymakers in the United States and Europe to impose far-reaching restrictions on Iran’s oil sector.”
Well, how did that work out? If you have a car, or merely walk past a gas station on a regular basis, you know the answer.
“But the policy has backfired,” Kemp writes. “Oil prices have surged, harming consuming countries and offsetting the impact of lower exports on Iran’s revenues.”
How could things have gone so wrong? Kemp tells us that “U.S. and EU sanctions were written very carefully to include plenty of flexibility to ensure they would not risk a spike in prices” (emphasis added). No doubt the best minds in the bureaucracies were on the case.
U.S. sanctions, set out in Section 1245 of the National Defense Authorisation Act for Fiscal 2012 (HR 1540), apply only if the president determines “the price and supply of petroleum and petroleum products produced in countries other than Iran is sufficient to permit purchasers . . . to reduce significantly in volume their purchases from Iran”.
Sanctions do not apply if the president determines an importer has “significantly reduced” its volume of crude purchases from Iran, and the president can waive them altogether if it is in the national interest.
The law mandates experts at the Energy Information Administration (EIA), in conjunction with the departments of Treasury and State and the head of the intelligence community, to review the availability of alternative supplies every 60 days. [Emphasis added.]
So how could it miss? The president, a smart guy advised by a slew of other smart folks, is empowered to determine all this stuff. And then experts review other important stuff.
Can’t miss, right?
Except it did. Kemp:
Two things have gone wrong. First, sanctions are interacting with other supply disruptions (in South Sudan, Yemen, Syria) to reduce supplies and exhaust the cushion of spare capacity Saudi Arabia holds. [Oops!]