Western efforts to tighten the screws on Iran for its nuclear ambitions is having the perverse effect of enriching the OPEC oil producer, as fears of conflict help buoy global crude prices.
Ministers from the Organization of Petroleum Exporting Countries are meeting Wednesday in Vienna, where Iran, along with Algeria and Venezuela, will be pushing for production cuts to ensure oil prices remain above $100 (U.S.) a barrel.
Oil traders have been nervous about political risks in the Middle East – first from the so-called Arab Spring and now from rising tensions about Iran's nuclear program. As a result, Iran may get its higher prices through sabre-rattling, even if it cannot persuade swing producers such as Saudi Arabia to rein in supply.
"Unfortunately, they are playing us like a fiddle," said Dan Flynn, oil trader at PFG Best Research in Chicago. "Unfortunately, here in the States, we can't get our energy infrastructure in place, or we wouldn't have to worry about these guys."
Crude prices soared on Tuesday after news reports that Iran is preparing to practice closing the Strait of Hormuz at the mouth of the Persian Gulf, through which about a third of the world's crude exports pass.
North Sea Brent, the key global benchmark, shot up nearly $4 (U.S.) a barrel before settling down to post a $2 gain to $109.08 per barrel, while West Texas Intermediate rose $2.37 to $100.14.
OPEC is expected this week to endorse production quotas of about 30.5 million barrels per day, a level that both the cartel and Western analysts say would leave the crude market well supplied.
Like all oil producers, Iran has reaped huge revenue gains in 2011 as oil prices recovered from recessionary doldrums in the face of supply disruptions in Libya and Nigeria, amid continued strong demand from emerging markets such as China.
Tehran is expected to earn a record $100-billion in oil export revenues this year, nearly 30 per cent more than it received in 2010, said Bhushan Bahree, global oil-markets analyst with IHS Cambridge Energy Research Associates in Washington, D.C.
"The West faces a classic Catch-22 in regards to Iranian sanctions," Mr. Bahree said. "Any sanctions that the West imposes will ratchet up tensions, which raises fears of a conflict and puts more upward pressure on oil prices. Unless Iran is forced to offer discounts to sell its oil, the result is a higher profit for Iran when it inevitably sells the oil to someone else."
Mr. Bahree added, however, that sanctions would hurt Iran in other ways, including the loss of productive capacity in its oil fields. The country has seen its crude output drop to 3.5 million barrels per day from more than four million in 2008.
"Iran has, over the years, been challenged in trying to maintain its oil production capacity but revenues from higher prices much more than offset any gradual decline," he said.
However, the International Energy Agency forecasts that, as a result of sanctions, Iran's capacity will drop below three million barrels per day by 2016.
The IEA, which represents industrialized countries, warned in a report on Tuesday that the European Union would face higher energy costs should it carry out threats to boycott Iranian oil exports.
"Given already low European crude inventories, a spate of precautionary buying and escalating tensions surrounding the Iranian issue could sustain [near-term]prices at levels higher than otherwise, amid growing concerns about the euro zone and weaker global economic activity in 2012," the IEA report said.
EU countries currently import about 600,000 barrels per day of Iranian oil, with Spain, Italy and Greece accounting for 75 per cent of that total.