Do oil embargoes work?
Date posted: February 17, 2012
There’s an international effort to reduce the purchasing of oil from Iran. Is it possible to stop purchasing a valuable commodity like oil from certain regions? And what might be the possible impacts on oil prices? N.C. State University economist Mike Walden responds.
“A little more background on this: Of course we have some issues with Iran regarding their nuclear program. And so there has been an effort in the world community to in some ways send a signal to Iran that we don’t like what they’re doing, and so we’re going to stop buying oil from them. And that’s their major export.
“Your question, I think, is very appropriate: How effective can that be? And the answer really depends on how tight you can make an oil embargo. For example, if the U.S. stopped buying oil from Iran, but Iran simply sold oil to Europe, then it’s not going to … have any effect. Oil is really fungible. It’s the same. It can move around the world. So, in that case, yes, the U.S. might not be buying, but someone else is.
“But on the other hand, if you do get enough folks in the world community to … stop buying, you probably can have some impact — at least on the short run. And history shows that embargoes can have an impact. They can reduce sales.
“Now in terms of price, this is the downside of this action. If you are reducing the sale of oil — and we have a tight oil market already — you’re obviously going to send the price up. And we saw that with some examples of embargoes in the 1970s.
“”So the cost of sending this signal — or in some sense punishing Iran for some of their other activities — is we could very well be looking at higher prices of gas and other oil derivatives in our economy.”
Category: Economic Perspective