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Almost three months have passed since the European Union (EU), backed by a number of other countries, imposed an embargo on Iranian oil imports. According to the International Energy Agency (IEA), during this time Iranian oil exports have fallen by two-third, from three million barrels of oil per day in July 2011 to about one million barrels in July 2012.

Almost three months have passed since the European Union (EU), backed by a number of other countries, imposed an embargo on Iranian oil imports. According to the International Energy Agency (IEA), during this time Iranian oil exports have fallen by two-third, from three million barrels of oil per day in July 2011 to about one million barrels in July 2012.

Almost half of Iran’s budget revenue comes from oil exports. In an attempt to prop up exports, Iran has been forced to reduce output, at least for now. As a result, last July Iraq surpassed Iran in oil production for the first time since the late 1980s (Iraq produced 3.02 million barrels per day to Iran’s 2.9 million). Importantly, oil importers did not experience any shortages, primarily because other exporters (primarily the Gulf countries with spare production capacity) have stepped in to make up the difference. They were able to do this, in part, because Iranian light oil is of a similar quality as Saudi light oil and Russian Urals. Moreover, by mixing different brands, the Saudis can produce oil that is similar to Iran’s crude brands.

Experts agree that Iran can make up for its losses in the oil market in the next few months. At any rate, it will be able to build its oil exports back up to the level of the end of the second quarter of this year, as countries that had to do without oil imports from Iran due to the ban on insuring tankers that carried it have resumed purchasing oil from Iran (like South Korea), sometimes at higher levels than before. India imports Iran’s oil on the condition that it is insured by Tehran, and Japan has provided state guarantees for oil shipments for the first time in its history.

Although Iranian oil industry minister Rostam Ghasemi believes that a fair oil price should be at least $150 per barrel, the market that has lost more than one million barrels of Iranian oil per day, has reacted with an insignificant price increase (in terms of the average quarterly price). The Skolkovo Energy Center conducted a study on the effect of the Iranian factor on the world market, which shows the trajectory of oil prices through the end of the next year under various scenarios (see chart).

Changes in Brent oil price in dollars per barrel

Blue : Baseline scenario
Red : Impact of EU embargo
Green : Impact of embargo (EU + Asia-Pacific countries)

Source: Skolkovo Energy Center based on information from the Center for Global Energy Studies (CGES)

Curiously, under the baseline scenario, assuming that at the end of next year Europe ends the sanctions announced early this year, oil prices would be higher that under current circumstances. The point is that restrictions on Iranian oil and the current high prices created by “market uncertainty” are encouraging other oil exporters (such as Iraq and Saudi Arabia) to increase oil exports.

What impact will this have on Russia? The chart below shows the estimated short- and long-term effects depending on whether the current EU oil embargo continues with the partial backing of major Asian countries, or the Strait of Hormuz is blockaded and LNG and oil tankers are prevented from making shipments.

All oil producing countries, including Russia, stand to gain from high oil and gas prices, but this gain may be short-lived. It will not offset the long-term negative impact on Russia, such as greater competition in the hydrocarbon market.

Short- and long-term effects on Russia of peaceful vs. military scenario

Source: Skolkovo Energy Center based on information from the Center for Global Energy Studies (CGES)
Co-authored with Maria Belova, Global Energy senior analyst at the Skolkovo Energy Center