Yesterday, Iran’s Oil Minister Rostam Qasemi told an audience at the World Energy Forum in Dubai that the Iranian government would halt all of its oil exports if the United States and other western powers strengthened their antinuclear sanctions against Tehran. “If you continue to add to the sanctions, we will stop our oil exports to the world,” Qasemi told a news conference, according to Bloomberg News, adding, “The lack of Iranian oil in the market would drastically add to the price.”
In the past, that kind of announcement might have made oil traders nervous, raising global prices. But since the international sanctions have been in place, Iranian oil exports have shrunk considerably, from 2.2 million barrels a day in 2011 to 860,000 barrels a day in September 2012. Iran’s shrinking share of the global oil market – and rising production in places like Saudi Arabia, Iraq and the United States that is offsetting supply shortages – has weakened Tehran’s ability to wreak havoc in the global oil market. That’s why oil prices fell to a three-month low, according to The New York Times: “On the New York Mercantile Exchange, the price of the benchmark grade fell $1.98 a barrel or 2.3 percent to $86.67, the lowest closing price since July 12.”
Most experts agree that Iran is unlikely to halt its oil shipments to those countries that currently have exemptions to the oil embargo, like India. The sanctions have already taken a toll on the economy. Iran’s currency has lost 40 percent of its value and sanctions against the country’s central bank prevent it from shoring up its currency with foreign reserves. Iran cannot afford to stop exporting its oil without further weakening its economy.
But even while Iran may not have as much direct influence in the global oil market, there is always the possibility that Tehran will try to indirectly raise global oil prices through more brazen efforts, like threatening or actually attempting to close the Strait of Hormuz through which 20 percent of the world's oil is shipped, which would raise global oil prices by as much as 50 percent in a few days. In that sense, Iran can still wreak havoc in the global oil market and onlookers should keep a watchful eye towards Tehran’s behavior.
In July, the Obama administration barred Iraq’s Elaf Islamic Bank from doing business with the U.S. banking system due to alleged ties to illegal financial transactions with Iran that threaten to undermine the effectiveness of Western sanctions against Tehran’s illicit nuclear program, according to The New York Times.
“The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy,” The New York Times reported on Sunday.
Iraq and Iran have steadily increased economic ties since the U.S.-led invasion in 2003, with trade estimated at around $11 billion a year, according to The New York Times report. “Just last week, an Iraqi delegation that includes the deputy prime minister and top officials from the ministries of finance and trade and the central bank met in Tehran with their Iranian counterparts for talks about further increasing economic ties.”
There is a good debate underway at the National Journal’s Energy Experts blog this week on economic sanctions against Iranian oil. In particular, there’s an ongoing discussion about the Obama administration’s recent sanctions exemptions to China, Singapore and others and what message it sends to the regime in Tehran and the rest of the world. Tune into the full debate here.
Here’s my take on the issue: “The Art of Sanctions”
Applying economic sanctions to coerce Iran to suspend its nuclear program requires a delicate balancing act. On the one hand, the United States needs to apply enough pressure to compel Iran to come back to the negotiating table (as it has done). On the other hand, the United States needs to avoid applying too much pressure, which might convince officials in Tehran to do something drastic out of the belief that it is the least bad option, like attempt to close the Strait of Hormuz to energy exports from other Persian Gulf petroleum producers.
Granting waivers to China, Singapore and others so that these countries can keep purchasing Iranian oil helps strike this balance. As the pressure on Iran ramps up with the European Union’s sanctions going into full force yesterday, Tehran’s ability to continue to export petroleum to some consumers helps keep Iranian officials from perceiving themselves to be locked in a losing status quo, which could be dangerously counterproductive. Generally speaking, states that frame the status quo as a losing one are more prone to belligerent actions in the hope that they can renegotiate the status quo in their favor.
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Iran has renewed negotiations with other world powers in Moscow over its nuclear ambitions after recent talks in Baghdad failed to produce any significant progress. The negotiations, which began today, include the five permanent members of the United Nations Security Council – the United States, Russia, China, Britain and France – Germany, the European Union and Iran.
The Moscow talks come on the heels of poor economic news for Iran and just two weeks before European sanctions against Iranian oil exports go into full force on July 1. According to The Washington Post, Iran’s currency – the rial – has lost 50 percent of its value in just 10 months; oil exports have declined by 40 percent from a year ago, contributing to a loss of about $4.5 billion a month in revenue; and targeted financial sanctions against Iranian banks and industries are constricting economic flow.
Meanwhile, Iran’s oil production is outpacing the available storage, which could force the industry to scale back production. “A report last week by the International Energy Agency said Iran was storing tens of millions of barrels of unsold oil in offshore tankers and would probably soon run out of space, forcing it to drastically cut production,” The Washington Post reported.
Iraq’s crude oil production has increased substantially this year despite sectarian violence, political infighting and modest recovery from years of war.
Increased oil production has contributed to a 20 percent rise in oil exports, bringing total exports to approximately 2.5 million barrels of oil a day, according to a report in The New York Times. The increased production is owed largely to modest improvements in security as well as technical service contracts with experienced foreign oil companies. “The companies brought in modern seismic equipment and modern well recovery techniques to resuscitate old fields,” The New York Times reported. Baghdad claims that these production improvements will enable the country to produce an additional 400,000 barrels a day by 2013, a step on the road to an announced goal of producing 10 million barrels of oil a day by 2017.
Iraq’s resurgent oil sector is likely to have positive benefits for the country and the global oil market. On the one hand, increased oil production will provide Baghdad additional revenue to help the fledgling government strengthen its legitimacy. As The New York Times reported, “Oil provides more than 95 percent of the government’s revenues, has enabled the building of roads and the expansion of social services, and has greatly strengthened the Shiite-led government’s hand in this ethnically divided country.” Moreover, Iraq’s production increase comes as Libya’s oil production is nearing a full recovery. Last week, Libyan officials announced that oil production had reached 90 percent of pre-civil war levels, with the country producing 1.6 million barrels of petroleum a day. Taken together, Iraq’s and Libya’s oil recoveries could help offset the impact of Iranian oil sanctions that will come into full force beginning in July. This will provide the global oil market added volume to satisfy demand and insulate consumers from dramatic price spikes.
Reuters reports on the international negotiations in Baghdad between Western and Iranian officials over Iran’s nuclear program. According to the report, negotiations appeared to be hindered by Western sanctions against Iranian oil exports. “Iran had served notice that it wanted immediate relief from economic sanctions as part of any deal to stop higher-grade uranium enrichment, a pathway to nuclear arms, whereas Western powers insisted Tehran must first shut it down,” the report says.
The National Journal reports on Wednesday’s Senate Foreign Relations Committee hearing on the national security case for ratifying the Law of the Sea Convention. Senator John Kerry, chairman of the Senate Foreign Relations Committee, said that he would hold off on a vote until after the November elections, suggesting that Congress could have a heated debate on the treaty during the lame-duck session.
The Wall Street Journal reports that on Wednesday Turkmenistan agreed to supply natural gas to both Pakistan and India, a necessary step toward realizing the trans-Afghan pipeline that has been twenty years in the making. Instability in Afghanistan and billions of dollars in investments are the two major roadblocks facing pipeline construction through Afghanistan.
There is some evidence that western sanctions on Iranian oil exports are taking a toll on the Islamic republic, even months before the sanctions go completely into effect in July. “Hobbled by sanctions against its banks and a growing international boycott of its petroleum, Iran is seeing its revenue sag while its oil sits in storage depots and floats in tankers with nowhere to go,” The Washington Post reports.
According to estimates by the Telegraph, approximately 19 of the National Iranian Tanker Company’s 34 oil tankers are lying idle off Iran, valued at about US$2.95 billion. “The fact that Iran is using valuable tankers for storage suggests that onshore holding facilities at Kharg Island, believed to have a capacity of 23 million barrels, must also be full,” according to the Telegraph. That holding facility could be storing an additional US$2.05 billion worth of idle oil. Moreover, Iran has become increasingly dependent on its own fleet of oil tankers since “One key impact of recent sanctions has been to choke off shippers’ access to maritime insurance, nearly all of which is underwritten in Europe,” according to The Washington Post.
Iran may be attempting to breed uncertainty in the global oil market in an effort to drive up prices and insulate itself from tightening economic sanctions, including those against Iran’s Central Bank.
On Sunday, Iran’s semi-official Fars news agency apparently reported that Tehran suspended a 500,000 barrel oil shipment to Greece. Reuters reported the story, citing that Iran’s Fars new agency stated, “Oil tankers that had come to transfer 500,000 barrels of Iranian oil to a refinery in Greece had to go back empty-handed after Iran refused to give the shipment.” However, as Reuters reported, Fars did not give a source for its report, and a statement from the Greek refiner Hellenic Petroleum, which was reportedly the intended recipient of the oil shipment, denied that Iran had suspended any oil delivery. “That has nothing to do with us ... all supplies from Iran have been processed normally,” a refinery spokesperson told Reuters.
The report follows a string of recent incidents that should raise concerns that Iran may be attempting to sow uncertainty into the global oil market in an effort to rebuff attempts to coerce Tehran to suspend its suspected nuclear weapons program. Last week, Iran made headlines after suspending oil shipments to Great Britain and France, which analysts say contributed in part to the highest oil prices in nine months. Yet, as reports noted, Iran’s suspension of oil shipments to Great Britain and France would have little effect on supply because Britain had not imported oil from Iran in six months and France only imports approximately 3 percent of its oil from the Islamic republic. Nevertheless, oil prices increased, in part as a “reflection of concerns about the further escalation in tensions between Iran and the West,” says one commodities expert, adding that "Banning the tiny quantities of exports to the U.K. and France involves very little risk for Iran – indeed quite the opposite, it catches the headlines and leads to a higher global oil price, which is something Iran is very keen to encourage."
There is a lot of chatter this morning about the potential for gas prices to hit $4 or $5 a gallon by Memorial Day, which could undermine stronger U.S. economic growth. Here are a few stories from the weekend that provide some of the geopolitical back story about why oil and gas prices are climbing.
Perhaps the big story over the weekend was Iran’s announcement on Sunday that it will suspend oil shipments to Britain and France in response to their embargo against Iranian oil, which – along with the rest of the European Union (EU) – is set to take effect in July. The announcement was seen as more symbolic than significant, given that Britain and France are not nearly as dependent on Iranian oil as other European countries are. According to The Huffington Post, “Analysts said Iran's announcement would likely have minimal impact on supplies, because only about 3 percent of France's oil consumption is from Iranian sources, while Britain had not imported oil from the Islamic republic in six months.”
It is unclear to what extent Iran would continue to restrict exports to Europe in advance of the July embargo, when existing contracts with the EU are set to expire. The New York Times reported that, “Iran may also be reluctant, when its economy has been damaged by existing sanctions, to deprive itself of revenues from its larger European customers.” What is more, Reuters announced on Monday that China’s Unipec – one of two major buyers of Iranian oil – is expected to purchase less oil from Iran in 2012; how much less oil is not clear from the initial report. That announcement could have an impact on Iran’s strategic calculus.
The announcement from Tehran on Sunday contributed to higher oil prices on Monday, pushing the cost of a barrel of oil to a nine-month high. On Monday, The Huffington Post reported that, “By early afternoon in Europe, benchmark March crude was up $1.91 to $105.15 per barrel in electronic trading on the New York Mercantile Exchange. Earlier in the day, it rose to $105.21, the highest since May. The contract rose 93 cents to settle at $103.24 per barrel in New York on Friday.”
Chatham House published a new study last week examining the implications of maritime choke points for the global energy market. The study, Maritime Choke Points and the Global Energy System: Charting a Way Forward, is timely considering tensions in the Persian Gulf where Iran has hinted at the possibility of closing the Strait of Hormuz in response to recent threats (economic and military) against its nuclear program.
The study generally provides a great overview of the challenges associated with seaborne oil transportation through several vulnerable straits and canals. For those interested in understanding the nature of China’s Strait of Malacca Dilemma, the international waterway through which it receives approximately 65 percent of its oil imports, the report offers some useful insights. In particular, the authors make an important distinction between the Straits of Hormuz and Malacca, noting that, “Whereas there are no alternative maritime routes to the Strait of Hormuz for oil exports from the Persian Gulf, shipments through the Straits of Malacca and Singapore could be re-routed, though at additional cost, through other waterways such as the Lombok Strait.” Such a distinction may seem insignificant, but it could have an effect on China’s strategic calculus over what role it might decide to play in helping keep the Strait of Hormuz open in case of a closure, including, perhaps, by supporting UN Security Council resolutions or other policies that may seem anathema to Beijing.
The report also reinforces the national security rationale behind ratifying the Law of the Sea Convention (UNCLOS). According to the authors, “The UNCLOS bargain accepted twelve nautical miles as the maximum extent of a state’s territorial sea but, in order to ensure freedom of navigation through key international straits, UNCLOS established a regime of ‘transit passage’ applicable to ‘straits used for international navigation’.” What is more, the authors note that “In signing UNCLOS in December 1982, Iran claimed that the benefits of UNCLOS, such as ‘transit passage’, did not apply to non-signatory states.”