What does the EU embargo on Iranian oil mean for the UAE?
The European Union has agreed an immediate embargo on new oil contracts with Iran while existing contracts will be allowed to run until July, in order to pressure Iran over its nuclear ambitions.
It is always uncomfortable writing about Iran when sat in the UAE even from a business perspective. But local business here can hardly ignore what is happening with Iran occupying islands less than 100km offshore.
The military balance is not an issue. Six warships from the US, France and USA led by a 100,000 ton aircraft carrier passed through the Strait of Hormuz yesterday without incident. Iran does not have such a navy and would very quickly lose what little it has if push came to shove. The EU is adamant that what it wants is to get Iran into ‘meaningful’ talks in the words of British foreign secretary William Hague.
What does this long shadow cast over the UAE economy mean? Does it call the UAE’s status as a safe haven from the Arab Spring uprisings into doubt? Will the oil supplies of the world be cut off?
The answer to the last question is the easiest. By this summer the UAE will have its crude oil pipeline bypassing the Strait of Hormuz operational, so the oil will stay flowing. If the tensions boost the oil price that will increase national revenues and quickly pay for the pipeline. It is also highly unlikely that the UAE would be hit in any military showdown, although accidents can happen. Still if the region became a warzone it would hardly encourage tourism and both Dubai and Abu Dhabi have their hotels to fill. July and August are low season anyhow.
For the Arab diaspora fleeing the Arab Spring countries the UAE will still be a safe haven. Crime figures show Dubai to be one of the safest cities in the world. Its modern urban infrastructure is also way ahead of any other in the region. Even the recent real estate crash makes accommodation more affordable.
Then again if the Strait of Hormuz became a battle ground the UAE could no longer function as a trading hub. Container ships would not be able to get the insurance to visit its ports. That certainly would be very bad news. But the navies of the US, UK and France are there to keep the Strait open.
So while the UAE’s new oil pipeline to Fujairah is a lifeline for the local economy, if the embargo goes ahead this summer there would be serious consequences for trade and tourism. This approaching EU oil embargo casts a long shadow over 2012 and it is a shame things could not have been resolved more quickly.
Of course this is written only from the UAE perspective. Some 90 percent of Japan’s oil supplies pass through the Strait of Hormuz, for instance. And the impact of a surge in global oil prices on the fragile global economy can only be imagined, and this is perhaps the biggest risk, not a military showdown.