European Union oil embargo looms over a defiant Iran

The European Union unanimously passed an oil embargo on Iran and halted all dealings with the Iranian Central Bank Jan. 23. This comes after the United States passed the National Defense Authorization Act (NDA) at the end of last year.

The NDA states that the U.S. will impose strict regulations on foreign financial institutions that have conducted transactions through the Iranian Central Bank. Under Secretary of the Treasury for Terrorism and Financial Intelligence, David Cohen, said in the text, ‘‘Treasury is calling out the entire Iranian banking sector, including the Central Bank of Iran, as posing terrorist financing, proliferation financing, and money laundering risks for the global financial system.''

"It is very likely that the U.S. pushed the EU," said Animesh Ghoshal, a DePaul University economics professor. Ghoshal said most of the Iranian oil is sold through the Iranian Central Bank and the U.S. is attempting to isolate the ICB from the world market.

In both the U.S. and EU perspective, the goal of the embargo is to deter Iran in plans to continue working on what may or may not be a nuclear bomb.

The European Union imports around 20 percent of Iranian oil, while the United States has not imported Iranian oil for years. In order to gain unanimous approval, the EU is allowing for a gradual waning of Iranian oil until a complete embargo takes place July 1, 2012.

According to the Tehran Times, Iranian officials have threatened to cut off supplies earlier in response to the EU embargo. This would force EU countries that currently trade with Iran to find new suppliers sooner.

If Iran cuts off supplies prior to July 1, it could spell disaster for countries such as Italy, who have outstanding contracts with Iran totaling about $1.5 billion, according to Reuters. Italy's contract was one of the reasons why the EU allowed the embargo to take place gradually, considering Italy's current difficult economic period.

Both EU and U.S. leaders have also begun urging other countries to join in the embargo efforts. India, which according to the latest data from the International Energy Agency imports approximately 9 percent of the country's oil from Iran, has already voiced opposition to the embargo and has made moves to avoid the tougher sanctions brought by the U.S. If India and China—two of Iran's largest importers—decide to keep buying Iranian oil and pick up the slack from the EU countries, then the embargo will have little effect.

"It's just a matter of switching," Ghoshal said. If Europe simply decides to buy more of their oil from Saudi Arabia, while China and India decide to buy more from Iran, there will be little to no effect.

While U.S. and EU governments are trying to ensure that this does not happen, cutting the world off from large supplies of Iranian oil could hurt the worldwide economy.

"This is what our political leaders don't want to face," Ghoshal said. "If China does not buy any more (oil from Iran) and the Europeans have to purchase their oil from somewhere with a reduced supply, the price will go up everywhere."

The International Monetary Fund (IMF) said that if new suppliers are not found quickly, the embargo could push the price of oil up 20 to 30 percent.

Higher oil prices would not only affect the whole American industry, but it would also hit closer to home in the form of higher gas prices.

"It is difficult to have an effective embargo without hurting both sides," Goshal said.