Iranian oil

Black gold - the fuel for prosperity and technological development in industrial societies. It's a blessing for humanity - and a curse. Oil is an incendiary substance as much as a raw material, over which wars were and are fought, and it is often extracted with little regard for the welfare of nearby people or the environment.

And yet we are dependent on it, the seven billion people worldwide use around four billion tons of it every year. And despite the increasing use of renewable energies, the demand for oil is going up - consumption reached a new all-time high in 2011 yet again.

Few countries boast their own oil resources - Saudi Arabia, Canada, and Venezuela have the most oil reserves, and then comes Iran, with 21 billion tons, every drop of which is important, because oil is a finite raw material. Nevertheless, the West likes to pretend that it can do without a portion of these reserves, namely the Iranian part. In the past year, the US, the European Union, and other states gradually imposed an oil and gas embargo on Iran - tightening sanctions aimed at putting pressure on Iran's nuclear program, which the West suspects masks the country's ambitions to build nuclear weapons.

But what effects do these sanctions have on the global oil market and the Iranian economy? And for how long can the West resist the pressure?

The psychology of oil prices

The tension on the world's raw material markets is unrelenting. If a conflict threatens, the oil price reacts instantly. The result: supply becomes tight and the price rises - that's the logic of the free market. Such fluctuations can put deep holes in the economies of many countries, and those with the strongest economies are often affected the most. A model by the Kiel Institute for the World Economy (IFW) predicted that German economic performance could drop between 0.2 and 0.3 percentage points in the short-term if the price for a barrel of oil rose by $10 (7.8 euros).

"The global oil market is very dense, there aren't many producers," said Mamdouh G. Salameh, oil expert and advisor to the World Trade Organization. "If you take one away, the price threatens to rise. At the moment Iran puts around 1.5 billion barrels on the world market every day." That means that without Iranian oil, the price would rise by $25 to $30 per barrel.

Meanwhile, the circle of buyers of Iranian oil has shrunk, since the US began pressuring them. At the moment, Iran, dependent on its oil income, seems to be the loser, because the rest of the world can still compensate for the lack of Iranian oil - at least for now.

How dependent is the West on Iranian oil?

It was easy enough for Europe. After the oil embargo was imposed, the EU countries replaced the shortfall quickly with the help of an old stop-gap: "Before the embargo, Europe imported 600,000 barrels of Iranian oil per day," said Salameh. "Spain and Greece were the biggest buyers. When the Iranian sanctions came into force, Libya came back into the picture."

During the unrest there, Libya's entire production had to be halted, but the North African country was soon back on its feet and exporting again. "At the moment a large portion of the 1.4 million barrels of oil that Libya produces every day goes to the EU."

Germany was barely affected by the Iran embargo at all. "We only imported a small quantity of oil from Iran before the embargo, about one percent of our total imports," said Hans-Georg Babies of Germany's Federal Institute for Geosciences and Natural Resources (BGR). That one percent was easily compensated for by countries like Russia and Norway.

Meanwhile, the US looked around for other suppliers and chose Saudi Arabia, the biggest OPEC supplier, with its supply of 9.1 million barrels a day. Not only that, with 36 billion tons the Arab monarchy still has the largest reserve worldwide - enough to slake even America's thirst.

But Salameh is skeptical. He believes the assumptions about Saudia Arabia's capacities have been exaggerated. "When the price climbed to $147 per barrel in 2008, the Saudis didn't have enough capacity to produce more to lower the price again," he said. "Even the then US President George W. Bush visited Riyadh and asked the Saudis to produce more."

OPEC told the president that the current supply was enough to meet current demand on the market. "But really Saudi Arabia and OPEC simply couldn't admit that they didn't have enough production capacity," said Salameh. "So at the end of the day Saudi Arabia was just another spectator who couldn't influence the price of oil." That circumstance hasn't changed now, which means the US could lose out in the end, Salameh argues.

How is Iran affected?

In Iran, the income from oil exports has halved within only a year, even though the sale of oil comprises the largest and most important part of the state budget. Some sources even estimate that 85 percent of the Iranian treasury is financed through oil income. Meanwhile, the Iranian currency, the rial, continues to fall, and has lost 80 percent of its value against the US dollar since 2011.

Iran's economy is struggling. The price of food is rising exponentially - many Iranians are fighting for their financial survival. So have the sanctions hit home? Not at all, according to the Iranian government, who claim the country is extracting and selling more than it did before the tightening of the oil embargo last year. Independent sources prove otherwise, however - they say that production has sunk by nearly a third. "Iran has not succeeded in diversifying its state income," said Salameh, which is having severe consequences.

Financial trade and the banking business are also subject to the sanctions, which is making oil exports even more difficult. Iran has tried to compensate by finding other ways to dispose of its oil - for instance by exchanging it. But that has also been made more difficult by the increased pressure from the US, points out Alexander Poegl, natural resources specialist for consultancy JBC Energy. What is causing the country to suffer particularly are the sanctions on the import of technical equipment and expertise from abroad. That is making it more difficult to keep the level of oil production stable.

And then there is another factor deeply affecting Iran - insurance. "Before the sanctions, up to 95 percent of the insurance on the cargo ships carrying the oil was handled by European companies. That has now gone," said Poegl. That means that, for the ports and buyers of Iranian oil, trading with Iran has become significantly riskier. There are no insurers in the event of damages being incurred, while Iran itself can handle only very limited financial transactions. "At the end of the day, Iran is the loser, because other countries can compensate for their trading volume," said Poegl. It's not only the Saudis compensating for the shortfall - there is now a lot of Iraqi, Russian, and West African oil in circulation.

Who will blink first?

It's a psychological game - one which puts both sides under pressure, and one which is keeping the world on tenterhooks. Analysts are divided on whether or not the sanctions are working. Poegl thinks the measures have succeeded, because "this time it seems like the international community, including countries like China, are all on the same page. That in itself is a huge success."

Salameh also thinks that the sanctions have been effective. But he warns that Iran is not considering capitulation. "Iran could say, 'if you put more pressure on us, we'll put more pressure on you by blockading the Strait of Hormuz and forcing the Gulf States to find another way to export." That would destabilize the oil price and leave the US as the big loser after all, Salameh argues. Around 20 million barrels of crude oil pass through the strait every day.

The solution to the problem would be to recognize Iran as a nuclear power. "Iran will continue with its nuclear program, regardless of how much pressure the West puts on it," said Salameh. "Up until now, Iran has said that it uses it for peaceful purposes, but that is just half the truth." Everyone knows, according to the analyst, that no country that has the technology to enrich uranium will stop at using it for peaceful purposes. "At the end of the day, Iran will ignore all the pressure and become a nuclear power," he concluded. The West has no other choice than to accept it as that - and that is Iran's ultimate goal.