In response to a European Union embargo on Iranian oil scheduled to into effect in July, Iran has threatened to unilaterally cut off its oil exports to six European nations. But while many observers see the move as a toothless bluff aimed at pushing oil prices upward, the prospect of uncertainty could prove disastrous for fragile European and global economies.

Despite an onslaught of bad economic news in Europe that is reducing global oil demand, prices spiked for a few hours Wednesday to their highest level in more than six months after Iranian state media erroneously published that crude supplies had already been cut to Italy, Spain, Greece, Portugal, France, and The Netherlands.

Prices dropped soon after the Iranian government clarified that it had simply notified diplomats of those European countries that it was setting new – and unacceptable, in European eyes – conditions to continue selling them oil, including disregarding the embargo that EU countries agreed to in January.

“It doesn’t make sense,” says Harry Tchilinguirian, senior oil market analyst in BNP Parisbas, a French bank. “They are going to stop selling oil to countries that agreed not to buy. It’s the same thing.”

But the market’s reaction illustrates the risks involved in the US and European decision to strain Iran's economy with an oil embargo over its current nuclear program, analysts say. Iran stands to lose less at this juncture because there are others willing to buy its oil and it can still deliver a big punch through oil prices.

Iran is demanding that EU countries relinquish the contractual right to stop payments in case of "cause major" like a war, asking for additional payment guarantees, and eliminating short-term oil supply contracts, Spanish Foreign Minister José Manuel García Margallo said in audio statement released Thursday by the ministry. He didn’t offer details.

Spain said that it has already secured alternative supplies, mainly from Saudi Arabia and Iraq, echoing similar calls for calm throughout Europe.

“If they were to cut it off earlier, we would accommodate quicker, that's what we'd do,” EU Trade Commissioner Karel De Gucht said Wednesday in Hong Kong after a trip to Beijing.

The market will adjust

Furthermore, from a technical point of view, in the unlikely event Iran actually decided to cut supplies unilaterally, it would take it as much as two months to implement – and even then, only if it had alternative buyers lined up.

Timing is critical, Mr. Tchilinguirian says. "In effect you have a window of one or even two months before it would hit oil supplies.”

Besides, Iranian imports “shouldn’t be so hard to be replaced.” The only country “that would be effectively hit is Greece because it imports between a third and half from Iran at terms no other supplies could match.”

EU Energy Commissioner Günther Oettinger said in Brussels officials are considering alternatives to allow Greece to secure oil supplies at market rates.

The EU has been gradually cutting back on Iranian supplies for some time, but it still bought a quarter of Iran’s exports of 2.5 million barrels per day between January and October 2011, according to the International Energy Agency. Spain, Italy, and Greece account for three-quarters of that.

Meanwhile, Asian economies have been buying more. China buys 22 percent of Iran’s exports, India 12 percent, and most of the remainder is exported to Turkey, Japan, and South Korea, close EU and US allies.

'We can mess with you'

EU officials have said the embargo, while economically painful, is necessary to pressure Iran into foregoing nuclear enrichment. But not all agree.

“This embargo was introduced without any thought to the consequences. [EU leaders] clearly didn’t bother to talk to energy experts about this,” says Paul Stevens, senior research fellow in energy at London-based Chatham House and an expert on oil markets. The commission should explain “who came up this … idea because it was a very stupid decision.”

“If Iranians decide to do this, Europe would cope with a lot of difficulty. We won’t know until it happens,” Dr. Stevens says.

And he is not sure it is a toothless threat. “I’d be surprised if this is a bluff," he says. "They could easily sell the oil to China instead. And it makes sense that they would [unilaterally cut supplies to Europe] because it would push prices up. They are saying ‘You wanna mess with us, we can mess with you and probably do more damage.’ ”

Get the Monitor Stories you care about delivered to your inbox. By signing up, you agree to our Privacy Policy

Still, most doubt Iran would cut supplies unannounced, and oil prices brushed off any immediate supply disruptions. In fact, while Iran announced what it described as significant advances in its nuclear program and threatened oil supply cuts, it also said it was ready to negotiate with the EU and US.

“Iran’s role in the sanctions regime is to offset potential losses from decreased sales to Europe, so it wouldn’t be surprising to have more saber-rattling that allows prices to rise,” Mr. Tchilinguirian says. “Any geopolitical tension involving Iran will prompt market reactions based on the headlines. We are going to get more of these, rather than fewer.”