For reasons related to domestic and international politics, the United States increasingly has employed economic sanctions and especially oil sanctions as a policy tool, seeking to influence the behavior of foreign regimes. Although the U.S. sometimes is joined by others in imposing economic sanctions, the more common situation is that the U.S. has acted independently, imposing sanctions unilaterally.Previous work on economic sanctions has dealt with broad sanctions, not limited just to oil. Much of this work has examined whether sanctions are effective in constraining the behavior of targeted countries, particularly when they are applied unilaterally. To date, there has been no formal analysis of the specific effects of oil sanctions, whether unilateral or multilateral.
This paper examines two types of oil sanctions, those against a country's exports and those against investment in the country's oil industry. It is argued that, because the U.S. is but one competitor in world oil markets, unilateral U.S. sanctions likely can impose only small costs on targeted countries. At the same time, such sanctions impose costs on U.S. refiners and equipment suppliers, reducing producer surplus to such firms. These costs arise in part because of "reputation effects," i.e., knowledge in markets that U.S. firms can be pre-empted from carrying out existing or future contractual obligations through government-imposed constraints to further U.S. foreign policy aims. By contrast, oil importers and equipment suppliers in other countries who are free of such constraints secure increased producer surplus from the unilateral U.S. actions.
Mutilateral oil sanctions are more effective in denying income to a targeted country, and sometimes can be the cheapest means to do so. However, they also impose large costs on consumers. The sanctions regime on Iraqi oil, for example, may be transferring roughly $25 billion annually from consumers to oil producers, some of whom are countries the U.S. also has targeted for sanctions. Further, while the loss of oil export income reduces consumer surplus in a country targeted by multilateral oil sanctions, the diversion of oil to the domestic market increases consumer surplus there.
Several reasons for oil sanctions are then discussed. These include signaling U.S. displeasure at the behavior of a targeted regime, denying the regime income it might use to further aims the U.S. is trying to prevent, and satisfying internal U.S. political demands for action to alter the regime's behavior, short of military force. Some pros and cons of the approach are identified. It is argued that a weakness of sanctions is that they do not operate at the margin of behavior; ie., they are a blunt instrument either in force or not, and not easily adjusted with the degree of deplored activity.
Another problem is that unilateral U.S. sanctions generally will not constrain targeted regime behavior because they are unlikely to have much economic impact. This also raises question how seriously they will be taken by such targeted regimes.
A further problem with unilateral U.S. sanctions is that if the public comes to understand that they are ineffective because of competition from foreign firms, political demands may arise to make them more effective through the use of secondary boycotts against those foreign firms. Although such boycotts may strengthen the sanctions, they create economic problems of their own and also may induce other countries to undertake efforts to modify U.S. behavior rather than cooperate to achieve common policy objectives.
Finally, although domestic political pressures undeniably exist to change the behavior of foreign regimes, there may be means superior to sanctions to do so. Depending on the particular behavior at issue, public statements of condemnation by U.S. officials can be publicized, attempts can be made to seek U.N. censure, the U.S. can seek to deny World Bank funding or other multinational funding, the U.S. can deny officials of the regime access to this country, etc.
Over the longer term, yet more options exist. "Engagement" refers to people contacts via trade and investment, travel, educational exchanges, official visits, and the like. An argument for engagement is that over time it can allow the direct spreading of U.S. culture and institutions, enhance the wealth of others besides the regime, and lead to rising citizen pressure on regimes to change their behavior in ways consistent with U.S. aims. Since trade and other economic relationships are likely to yield results fairly slowly, over many years, this argument implicitly assumes that it is preferable to take a longer run view towards changing an offending regime's behavior, and that engagement is the more effective tactic over the longer term.
In sum, although there may be instances in which oil sanctions are the best means available to constrain a regime, they are an expensive and not particularly effective means to achieve foreign policy objectives. For that reason, oil sanctions should be approached cautiously and other foreign policy tools -- including longer term attempts to change regime behavior through engagement via trade and other contacts -- considered more seriously.