Contra Iran

Escalating conflict between Iran and the West creates negative repercussions worldwide By Su Xiaohui

Contra Iran

Escalating conflict between Iran and the West creates negative repercussions worldwide By Su Xiaohui

MUTUAL DAMAGE: Iranian Supreme Leader Ayatollah Seyyed Ali Khamenei speaks during Friday prayers in Tehran on February 3. He warned the United States will suffer from any war threat or potential war against Iran

Iran has been under sanctions of European states and the United States for many years.Recently, the West has been pressing Iran harder by declaring more sanctions against Iran’s petrochemical and financial sectors. Washington also raised its tone about military attacks. Tehran threatened to block the Strait of Hormuz, and held a series of military exercises in the strait.Confrontation between Iran and the West has created negative influences in many ways.

The author is an assistant research fellow with the China Institute of International Studies

The sanctions have heavily damaged Iran’s domestic economy, making Iranians’livelihoods much harder. There is also a bigger possibility that the U.S.-Iranian conflict could get out of control. Moreover, the problem has caused uncertainties to international energy supply and oil prices. As a result,many Asian and European countries are confronting greater challenges in their economic development, which might drag down the global economic recovery.

Lowering living standards

Western sanctions have caused Iran’s inflation to spiral out of control. The Iranian Government confirmed that the country’s inflation rate is about 21 percent, and food prices have increased 20 percent in recent months. Oil prices of this oil-producing nation are seven times higher, and bread prices are four times higher because the government had to terminate subsidies for oil and some food to cut de fi cits.

The Iranian rial has depreciated sharply,causing further price rises. Prices of electric and electronic products like computers, cell phones,TV sets and refrigerators have mounted over 50 percent, while prices of some imported medicine have gone up about 30 percent. The living conditions of those under the poverty line, who account for 17 percent the Iranian population,have worsened.

Depreciation of the rial has also disordered Iran’s currency market. Both businesspeople and ordinary people are rushing to buy foreign currencies and precious metals like gold. And black market trading of the rial is extremely messy. Millions of Iranian poor,who have long relied on economic support from overseas relatives, are suffering because they cannot get remitted money in time due to Western sanctions that block Iranian banks’fi nancial transactions.

Fueling regional tensions

Analysts believe chances of a military con fl ict between Tehran and Washington are low. The United States is going to have a presidential election in November. Launching a military strike obviously will not help U.S. President Barack Obama win a second term. Israel is unlikely to start a war without U.S. support.Although insisting on a hard stance, Iran will not start a war because of its weakness.

However, the risk of a military conflict has grown in recent months while neither side is prepared to give in. First of all, if Europe and the United States corner Tehran by unlimitedly conducting sanctions, it will be quite possible that Iran will fight out of desperation. Ever since 2011, pressure of Western sanctions has been growing. On November 21, 2011, the Unites States announced that it would launch sanctions against Iran’s petrochemical and oil sectors as well as companies involved in Iran’s nuclear programs. It also called on its allies to take similar actions.

The British Government declared new economic sanctions against Iran, requiring all UK fi nancial institutions cut off their fi nancial connections with Iranian banks. Canada decided to stop exporting all materials related to oil, natural gas and petrochemical production to Iran. It also blocked “virtually all transactions” with Iran, including cooperation with the Iranian central bank. On January 23, 2012,EU members agreed that they would not import crude oil and oil products from Iran beginning in July and launched a basket of economic sanction plans against Iran.

Iran showed strong responses against Western sanctions. Iranian officials claimed that Europe must be punished for its provocative behavior. Teheran threatened to close the Strait of Hormuz, and is considering taking proactive measures such as stopping the export of crude oil to Europe to strike the European economy.

The domestic situation in Iran also may make the whole situation get out of control.On the one hand, the current Iranian administration is possibly using its confrontation against the West to cover domestic economic problems and political fights. On the other hand, supporters of Iranian President Mahmoud Ahmadinejad and loyalists of Iran’s Supreme Leader Ayatollah Seyyed Ali Khamenei are engaged in a heated competition. They argue about which one of the two leaders can best represent the Islamic Revolution’s ideals and how to secure the Iranian administration under growing international pressure. Western sanctions have intensi fi ed disputes between different factions in Iran. The Iranian Government’s ability to control the country has decreased because of internal political fights. As a result, Iran has resorted to imprudent actions, such as attacks on the British Embassy in Tehran in November 2011, actions that have sharpened con fl icts between Iran and the West.

Threatening energy security

Confrontation between Iran and the West has caused worries in the international community about energy security. The cut-off of Iran’s oil exports will damage Asia’s and Europe’s energy supply. Being an important energy producer, Iran has at least 93 billion barrels of oil reserves, taking up 10 percent of the world’s total and ranking fi fth worldwide.Its daily oil production capacity is 4.1 million barrels, half of which is sold to global oil markets, making the country the world’s second biggest crude oil exporter.

The EU is Iran’s second biggest oil importer.Every day, it buys about 600,000 barrels of oil from Iran, of which Greece shares 25 percent,Italy 13 percent, and Spain 10 percent. Asia imports about two thirds of Iran’s crude oil and condensate oil exports. Oil from Iran accounts for 10 percent of Japan’s oil imports, 8.3 percent of South Korea’s, 11 percent of China’s and 12 percent of India’s.

If Iran’s oil exports are terminated, the world’s daily oil supply will drop about 2.3 percent. And oil-importing countries in Europe and Asia would have a hard time fi nding an alternative supplier any time soon. For example, South Korea imports crude oil from Iran at a price of $102.89 per barrel, which is lower than the prices of the United Arab Emirates, Saudi Arabia and Kuwait. If South Korea turns to another oil supplier, its oil re fi neries will face a loss of tens of millions dollars annually.

The Strait of Hormuz is an important oil transportation passage in the world. One third of global ocean oil shipping is conducted through the strait, including three quarters of Asia’s oil imports. If Iran shuts the strait down, global energy supply will be heavily impacted.

Growing energy supply and transportation risks inevitably provoke fluctuations in oil prices. Light sweet crude for delivery in March increased $1.25 to $99.58 a barrel at the New York Mercantile Exchange, up about 1.3 percent on January 23 after the EU declared its new oil embargo on Iran. Brent crude oil futures for delivery in March at the International Petroleum Exchange in London grew 0.66 percent to $110.58 that day.

Analysts foresee that an escalation in the confrontation between Iran and the West will cause chaos in the international energy market, with consequences more devastating than the turmoil in the West Asia and North Africa in early 2011. Crude oil prices might surpass$200 a barrel.

The EU is Iran’s second biggest oil importer. Every day, it buys about 600,000 barrels of oil from Iran, of which Greece shares 25 percent, Italy 13 percent, and Spain 10 percent

Slowing global recovery

The EU’s oil embargo against Iran is not good news for the European economy, which has remained weak since the 2008 global financial crisis. The EU set the embargo deadline on July 1 to give Greece, Italy and Spain enough time to fi nd other suppliers, because the three import most of their oil from Iran. If Iran seizes this “weak point” and cuts off its oil supply to the three nations in advance, the economies of the three nations could collapse.Also, Japan and South Korea are negotiating with Washington and asking to be exempted from Iran oil sanctions to keep their economies from being in fl uenced.

Oil price turbulence triggered by the confrontation could slow down the world’s economic recovery. Deutsche Bank predicted that if international oil prices can maintain current levels, the global economy will post a growth of 3-3.5 percent in 2012. If oil prices grow to $125 a barrel, the global economic growth rate will decrease to 2.5 percent. If oil prices rush to $150 a barrel, the world economy will face disastrous consequences.

Escalating confrontation between Iran and the West will not only hurt both sides, but also cause more turbulence to regional security and deteriorate the sour world economy.