Not smart sanctions

Weakening oil prices have allowed the US Congress to indulge itself on the sanctions issue, industry officials say.

Weakening oil prices have allowed the US Congress to indulge itself on the sanctions issue, industry officials say.

Analysts caution market fundamentals may be temporary. But for now Congress thinks it has the breathing room to antagonize US allies, the White House, and most of the world's top oil producers. It is good political theater, too, since polls suggest voters want someone to blame for this spring's higher fuel prices.

To that end, leaders of the Republican-led House and Democratic-controlled Senate have pledged to renew the Iran Libya Sanctions Act for 5 more years. ILSA, due to expire this August, seeks to punish foreign companies or countries that invest in either country. Recognizing its political options are few, the White House has sought to renew the law for only 2 years, but both houses so far have rejected that compromise.


The White House told two congressional committees a 5-year extension would be counterproductive and would complicate a pending interagency review of all sanctions. "Sanctions must do more than provide psychological satisfaction," the State Department told the Senate Committee on Banking. "They must be part of an integrated policy," it said (OGJ Online, June 28, 2001).

Yet that integrated policy remains elusive.

Oil markets softened despite Iraq's rejection of a US-UK "smart sanction" proposal, thanks to solid US inventories, according to Adam Sieminski, Deutsche Bank Alex. Brown energy analyst.

Yet the picture could get more complicated if the impasse between Iraq and the United Nations drags on. The US-endorsed sanction plan would expand oil trade if weapons inspections were better monitored.

However, Iraq "seems intent on prolonging its export disruption until the oil-for-food program is renewed for another 6 months or until it squeezes every last concession out of the United Nations Security Council," Sieminski said June 27. "Although Iraq's Saddam Hussein is as unpredictable as always, the environment looks ripe for a longer-than-normal disruption and consequent support for oil prices."

Dangerous game

Veteran policymakers worry that Congress' renewed attempt to sanction Iran and Libya could sabotage any meaningful chance to resolve the US's lingering problems with Iraq.

Key US allies in the Middle East, such as Saudi Arabia-also an important US oil supplier-have pledged their support toward "smart sanctions." However, part of that support is hinged on the assumption that the US will seek to engage Iran in the not-too-distant future, the Saudis indicated. "We believe an American-Iran dialogue adds to the stability of the region," Saudi Crown Prince Abdullah said last month.

A June 2001 American Petroleum Institute paper also cautions that the US cannot afford to use sanctions indiscriminately.

"If the US fails to address this issue, high energy prices could once more trip a staggering economy into recession. On the other hand, the effect of relaxing sanctions offers the potential for US firms to participate in expanding global supply. It is time to seize the opportunity," API said.

The API study updates a similar September 1998 analysis that said unilateral sanctions against oil-producing countries are ineffective. API said US sanctions generally hurt national energy security by reducing available global oil supply and trade embargoes also diminish US competitiveness abroad.

More in Economics & Markets