What happens when the EU stops buying Iranian oil?

Posted: January 24, 2012 by alephnaughty in Economics, International affairs

Demand for Iranian oil declines, holding supply fixed, which lowers the price of Iranian oil on world markets. Demand for non-Iranian oil rises, holding supply fixed, which raises the price of non-Iranian oil on world markets. Everyone outside the EU sees Iranian oil going for less than non-Iranian oil, and so buys more. Demand for Iranian oil rises, holding supply fixed, which raises the price of Iranian oil on world markets. Demand for non-Iranian oil declines, holding supply fixed, which lowers the price of non-Iranian oil on world markets. From the perspective of world markets, it’s a wash. From Iran’s perspective, all that changes is who is buying their oil; neither the price nor the quantity sold changes (after an adjustment period). Inside the EU, the supply of oil is effectively restricted, raising its effective price. Outside the EU, the supply of oil is effectively expanded, lowering its effective price.

In short, the equilibrium impact of this move is to make EU citizens poorer and non-EU citizens richer. There are ways to make Iran suffer. This is not one of them.

Addendum: Goldman seems to agree, though they think Iran would suffer somewhat from lower prices. They probably know more about the relevant elasticities than I do, but my basic point stands.

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