Karl Marx believes it is the economy which constitutes the policies; an idea not rejected even by his critics. But in case of Iran, oil has been the cornerstone of the country’s economic, political, and cultural structure during the past century. Whenever there has been turbulence in the oil market, every other sector, including politics and economy, has been affected in a chain reaction.
Oil was not only critical to Iran’s domestic affairs, but also a major factor in its international relations. To understand the significance of oil in Iran, it is necessary to understand the country’s long history with petroleum. Oil was first discovered in Iran in 1908, in the southwestern province of Khuzestan. By the 1920s, the national oil industry had matured, an enormous refinery had been built in Abadan on the Persian Gulf, and Iran was among the top five oil producers in the world, accounting for 5-6% of world production.
Yet the industry was owned and operated by a British firm, the Anglo-Iranian Oil Company, and the bulk of the oil revenues were shared between the British government and oil company, with only a small percentage paid to Iran. This situation came to a head during the 1951-53 oil nationalization crisis, when Iranian prime minister Mohammed Mosaddeq nationalized the country’s oil industry, sacking the British technicians from Abadan.
Britain responded with threats and sanctions. London imposed an embargo and a blockade, halting Iran’s oil exports and hitting its economy. Some historians argue that control over oil was the primary reason the United States and Great Britain plotted to overthrow Mosaddeq in the infamous coup of August 1953. Mosaddeq's overthrow, still given as a reason for the Iranian mistrust of British and American politicians, consolidated the Shah's rule for the next 26 years until the 1979 Islamic Revolution. It was aimed at making sure the Iranian monarchy would safeguard the West's oil interests in the country.
The second wave of sanctions on Iran’s oil sector took place following the Islamic Revolution in 1979 after Iranian students stormed the US Embassy in Tehran. American companies and individuals were prohibited from trading directly or indirectly with Iran’s oil and gas sector, the government of Iran, or individuals connected to the oil and gas sector or in any financing of it. US interests were also prevented from investing in Iran’s oil and gas industries.
Then came the D’amato bill, or the Iran and Libya Sanctions Act of 1996. The Act targeted both US and non-US businesses making certain investments in Iran. Under ISA, all foreign companies that provide investments over 20 million dollars for the development of petroleum resources in Iran will be imposed two out of seven possible sanctions, by the US.
But the major oil-related sanctions were imposed by the United States and the European Union in 2012 to pile pressure on Iran over its nuclear program. The result was a 1.4 million barrel per day decline in Iranian exports compared with pre-sanctions levels. The US and EU measures prohibited large-scale investment in the country's oil and gas sector, and cut off its access to European and American sources of financial transactions. Further sanctions were implemented against the Central Bank of Iran (CBI), while the EU imposed an embargo on Iranian oil and banned European protection and indemnity clubs from providing Iranian oil carriers with insurance and reinsurance. The implementation of insurance-related sanctions was particularly effective in stemming Iranian exports, which affected not only European importers but also Iran's Asian customers who were forced to temporarily halt imports.
Sanctions affecting investment in Iran's oil sector were also tightened, resulting in the cancellation of new projects by several foreign companies; they also negatively affected existing projects. Following the implementation of sanctions in late-2011 and mid-2012, Iranian oil production dropped dramatically. Although Iran had been subject to four earlier rounds of United Nations sanctions, these much-tougher measures passed by the United States and the European Union severely hampered Iran's ability to export its oil, which directly affected its production of petroleum and oil products.
The United States has a long history of sanctions against Iran and many other countries around the world. A brief study on the history of economic sanctions worldwide suggests that in total, about two-thirds of all economic sanctions were imposed by the United States.
On the other hand, Iran’s dependence on oil revenues is irrefutable. Iran ranks second in the world in terms of natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still largely depend on oil revenues and therefore remain volatile. However, the Islamic Republic has been trying, over the years, to reduce such dependency. According to the government’s “Sixth Economic Development Plan,” dependence on petroleum export revenues shall be reduced to 20 percent by 2022 and completely eliminated by 2024.
According to the experts as long as Iran’s oil revenues affect its political and economic relations, the lever of pressure against the country will exist and its government can be subject to oil sanctions.
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