Javier Blas is the FT's commodities editor
Now that the European Union has made clear it is moving towards imposing an embargo on Iranian oil, how will Tehran respond? What if Iran moves first, on its own terms, and imposes an oil embargo to Europe?
The scenario, raised by Lawrence Eagles, head of oil strategy at JPMorgan in New York, is tremendously important. Mr. Eagles is a former senior official at the International Energy Agency, the Western countries' oil watchdog, so his warning carries a bit of extra weight.
"The closer more stringent oil market sanctions come to reality, the greater the potential for Iran to become the first-mover," he says.
Iran is the world's third-largest oil exporter, only behind Saudi Arabia and Russia, selling about 2.2 million barrels a day. The EU last year bought about 450,000 b/d, or a fifth of Iran's sales. Italy and Spain accounted for about 70 per cent of the EU imports, with the rest made up by Greece, France, Germany, the Netherlands and the UK.
"Hypothetically, if Iran halted exports to key countries, pre-empting the imposition of tighter sanctions, a supply loss could come quicker than the market expects and would, in our opinion, elevate associated concern," Mr Eagles wrote in a note to clients. He is not alone in thinking about Tehran's current options. Oil executives have also told me they are concerned about the possibility Iran could move first.
Europe's calculations about the timing of an embargo gives Iran an opportunity to move first.
The EU has reached agreement in principle on the ban, but countries are seeking time to find alternative sources of supply. By delaying a decision to mid-January, the EU allows Italy, Spain and others to negotiate a supply hike with other producers, notably Saudi Arabia, and also gives additional time for Libya's oil industry to further recover from the civil war, boosting regional supplies.
At the same time, delaying a decision until the new year would take advantage of a seasonal drop in oil demand in Europe. Regional consumption starts to fall in late February or early March with the end of the northern hemisphere winter.
The International Energy Agency estimates that European oil demand will peak in the fourth quarter of 2011 at 15.1 million b/d and then fall to 14.6 million b/d in the second quarter of 2012 when refiners go into maintenance after the winter. The difference is, roughly, equal to all the oil imported from Iran by the EU. By the time consumption starts to rise again in the third quarter, European policy makers hope to have found alternative supplies.
But that neat arithmetic would be turned on its head if Tehran announces its own embargo tomorrow, potentially wrongfooting the EU and catching the oil market off guard.
Of course, such a move carries risks for Iran, too.
When there was talk of sanctions on Syrian general exports earlier this year, Damascus attempted a ban on imports in retaliation but then had to retreat because of an outcry in the business community.
Even so, Tehran could try to split the emerging consensus in Europe about the embargo, announcing a selective ban. It could impose an embargo against France, Germany and the U.K. -- the main forces behind the plan -- and spare Italy, Spain and Greece, its biggest clients. True, European solidarity might prevail, but if oil prices rise sharply -- as is very likely -- do not count too much on it, particularly with economies heading into recession.