Rethinking Iran sanctions

As the United States and the European Union work to induce Iran into serious negotiations over its nuclear program through increased sanctions, Korea has found itself in a conundrum. Should it forgo its immediate-term economic interests or accept Iran’s offer to resume imports of Iranian crude oil?

Given the complex and volatile nature of the Middle East, issues in the region should not necessarily be viewed as unconnected. Instead, rather than viewing the issue of sanctions through the lens of Korea’s economic and energy interests in Iran, they should be viewed from the perspective of Korea’s broader interests in the region and how Korea’s actions are likely to impact those interests.

The general understanding is that oil is the overriding interest of any nation that imports from the Middle East; however, the real underlying interest for importing nations is the maintenance of peace and stability which allows for oil to continue flowing at a reasonable price. As instability in the region increases the prospect of higher prices or disruption in the flow of oil becomes progressively larger.

Continuing the flow of oil from the Middle East is critical for the smooth functioning of the Korean economy, which imported nearly 40 percent of its primary energy from the region in 2011 according to the Korea Energy Economics Institute. Based on trade statistics, Korea imported 87 percent of its oil from the Middle East last year, including 9.4 percent from Iran. In addition, the Middle East is an important supplier of liquefied natural gas, which is another important energy source for Korea.

Korea was able to suspend imports from Iran in July thanks to increased imports from other Middle East nations. However, while the cost of importing oil from other sources is higher in the short run than the cost of importing discounted Iranian oil, if Korea’s resumption of oil imports contributed to a sense on Iran’s part that it could successfully ignore the sanctions efforts it seems unlikely that the short-term savings would outweigh the longer-term costs.

Put another way, last year Korea imported $100.8 billion in crude oil. If it had saved 20 percent, which would be a generous discount, of those imports from Iran then the savings would have amounted to $1.9 billion. However, if the price of Dubai Brent crude, which is the benchmark price for most of Korea’s oil imports, had risen by 2 percent on the rest of Korea’s imports it would have negated any savings from Iran.

Of course, because Korea would potentially resume imports of Iranian oil at a lower level than last year in order to maintain its waiver from U.S. sanctions the starting point for savings from Iran are now lower. Beyond the issue of cost, recent reports indicate that Israel may be moving closer to considering a military option to address its concerns about Iran’s nuclear program.

As the U.S. works to prevent the situation breaking into a conflict, the U.S. Congress is already considering harsher sanctions that would target Iran’s tanker fleet, potentially impeding the means through which Korea would resume imports from Iran. None of this of course takes into account whether Korea would be able collect on promised Iranian insurance for shipments should there be a spill.

Should a conflict break out in the region, it would not necessarily have to break out into full-scale war to drive up the price of oil. If Israel were to attack, all Iran would have to do to drive up the cost of oil is impede, rather than stop, the flow of oil through the Straits of Hormuz, something most analysts think it is capable of doing.

If avoiding a conflict in the region is the key to maintaining lower oil prices, there would seem to be only two overriding reasons to resume imports from Iran at this point.

Either the guarantees of additional Middle East shipments are not sustainable or spare capacity in international oil markets has fallen to such a degree that price increases due to scarcity in international oil markets threatens drive up the price of oil and undermine the sanctions.

Both of which would require additional Iranian crude to return to the markets. However, neither of these situations seems to be the current case.

However, there are risks to maintaining a ban on Iranian crude. Iran could follow through on threats to ban Korean imports which were worth $6 billion last year, while a prolonged ban could give Korea’s competitors a strategic position in Iranian energy markets should the nuclear crisis be resolved.

While real, they would not seem to override the need to reach a peaceful solution to the current crisis that avoids a disruption of the flow of oil or a significant rise in its price. Additionally, the inroads Korea could make in the broader region by continuing to distinguishing itself from Japan and China could prove to be more lucrative in the long-run.

* The author is the Council on Foreign Relations - Asan Institute fellow at the Asan Institute for Policy Studies. The views expressed here are his own.

by Troy Stangarone