THE SANCTIONS GAME PLAN
In an influential report on the "Oil Market Impact of Sanctions Against the Central Bank of Iran", which has circulated widely in Washington and European capitals, sanctions advocates Mark Dubowitz and Reuel Marc Gerecht of the Foundation for Defense of Democracies, promised "given adequate lead time, the oil market can adjust to most sanctions scenarios."
"It's possible to reduce Iranian oil revenue without reducing Iranian oil supply," they wrote.
The report presented detailed estimates of discounts for Iranian crude and the impact on government revenues depending on how many countries join the sanctions, whether other OPEC producers up their own output to compensate, and whether the remaining buyers for Iran's oil collude to extract significant discounts.
Dubowitz and Gerecht also estimated the impact on world oil prices, arguing they need not rise at all if the market responded "rationally" but could surge by as much as 40-50 percent if the market panicked or the Iranian government was plunged into crisis.
"Even if (sanctions) do not result in a physical oil market disruption, financial market reaction could drive up the price of oil. Eliciting commitments from other OPEC producers to offset any disruption in Iranian supply, giving Chinese firms a pass on compliance, and allowing other companies enough time to adjust would minimise the impact on oil prices and maximise the impact on Iranian revenue," wrote the authors.
"Making this game plan clear to financial and energy traders alike would reduce the risk of an alarmist market reaction".
OTHER SUPPLY INTERRUPTIONS
Dubowitz and Gerecht identified many of the factors that would influence the impact of sanctions on oil prices and Iran's revenues (including the extent of compliance, the response of OPEC, collusion among Iran's remaining customers, and the response of financial markets to actual and expected supply losses).