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EU Oil Embargo of Iran Begins

Over the weekend the European Union inaugurated its embargo on Iranian oil, the most wide-reaching impediment to the Iranian economy of the recent sanctions. The EU as a market is bigger than the United States, so this is significant for Iran. And oil accounts for 80% of Iran’s total exports.

Monday marks the first day of oil trading under the embargo, and the International Energy Agency estimates as much as one million barrels of Iran’s crude may leave the market.

Oil companies, including French oil major Total SA, and Royal Dutch Shell PLC, have already ended their dealings with Tehran to comply with the embargo. Countries outside of Europe are following suit. South Korea last week said it would suspend Iranian imports by July 1. India may also be forced to halt imports as insurance for most of Iran’s shipments has been provided by European firms.

Because this is happening with oil trading at $80 a barrel rather than $100, the spillover effect on oil prices will be mitigated. Anyway, for the time being, Saudi Arabia has increased their output to compensate. And the global economic slump has dampened oil demand (so yay!).

Perhaps the imposition of the embargo can explain why Iran may fire missiles during military exercises this week:

“During the war games, long-range, medium-range, and short-range missiles will be used and will be fired from different points across the country at 100 designated targets,” Brig. Gen. Amir Ali Hajizadeh told reporters, according to Mehr (Iranian news agency).

The point of the exercises, he said, is to give experts the chance to assess the “precision and efficiency of warheads and missile systems,” the agency reported.

Back at the time that the embargo was first discussed, Iran suggested that they would close the Strait of Hormuz to oil tankers. I don’t know if that tactic will return, but considering that negotiations have stalled, this could facilitate more desperation on the part of the Iranians. And that certainly risks conflict.

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David Dayen

David Dayen

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