Sunday, January 6, 2013

Iran Has Only Four Customers For It's Oil

Asia Is Purchasing Nearly all of Iran’s Oil -- Zachary Keck, The Diplomat

Pac Money
Four Asian countries are now purchasing nearly all of Iran’s oil exports according a report this week from the Economist’s Intelligence Unit (EIU).
“Almost all of Iran's oil exports now go to China, South Korea, Japan and India,” the report said even as it noted a sharp decline in the amount of oil each country purchased from Iran during 2012.
Iran’s oil exports have been cut in half as a result of U.S. and EU sanctions that were enacted last year to pressure Tehran into making concessions on its nuclear program, which the West believes is aimed at acquiring a nuclear weapons capability but Iran claims is intended solely for peaceful purposes.
Oil exports make up 80% of Iran’s total export earnings and 50-60% of government revenue according to the EIU report. Iran’s government budget for the current fiscal year ending in March forecasted oil exports of 2.2 million barrels a day (b/d). The International Energy Administration (IEA) recently estimated sales of around 1.1 million b/d, resulting in monthly losses of $5 billion for Iran according to a widely cited estimate. The sanctions and the Islamic Republic’s habitual economic mismanagement have also combined to send Iran’s currency plunging in value over the last six months.
With many of Iran’s oil customers bowing to Western sanctions, Iran’s dependence on the four Asian countries has grown substantially. Tehran has become especially dependent on China, which has long been its primary trading partner. Still, China is now estimated to purchase roughly 50% of Iran’s total oil exports despite having decreased its oil imports from Tehran by 23% year-on-year through the first 11 months of 2012.
India has similarly seen its reliance on Iranian crude decline sharply, with year-on-year imports down 17% in the first 8 months of 2012. Indian officials have also suggested they plan to cut imports by an additional 10-15% in 2013.
Both South Korea and Japan reduced their oil imports from the Islamic Republic by around 40% in the first 11 months of 2012 and pledged further reductions in 2013. Seoul has implied it could decrease its year-on-year imports by as much as 20% through the first six months of this year ending in May.
A U.S. sanctions bill signed into law by President Obama on December 31, 2011 cuts off access to the U.S. financial system to any entity conducting business with Iran’s central bank—which is the country’s primary mechanism for processing oil payments—along with other large Iranian banks. The legislation does allow the Obama administration to grant three-month renewable waivers to countries that continuously reduce their crude purchases from Iran. China, India, South Korea, and Japan have been granted two waivers since the sanctions went into effect in July 2012.

Meanwhile, the EU passed a boycott that prohibits any member state from purchasing oil from Iran. More burdensome for Iran, EU sanctions also prohibit European maritime insurance companies—which dominate the industry—from insuring oil tankers carrying Iranian crude, which has forced Iran to cover the insurance costs itself in order to convince its few remaining customers to continue purchasing crude.  These remaining customers have also demanded significant price concessions from Iran in order to continue their economic relations with the Islamic Republic, reducing the revenue Iran receives on the oil it can sell.
The situation is only likely to worsen for Iran in the months ahead. To begin with, global energy trends and continued sluggish economic growth make it easier for Western nations to sustain the sanctions without causing a spike in energy prices.
In fact, the U.S. continues to strengthen the existing sanctions regime. Early this week, President Obama signed into law the National Defense Authorization Act, which for the second straight year included rider provisions sanctioning Iran. Besides strengthening sanctions in the existing areas of energy, shipping and shipbuilding sectors, the new bill seeks to restrict Iran’s trade in precious metals, graphite, aluminum and steel, metallurgical coal and certain types of commercial software, according to the Wall Street Journal. The bill also directs the U.S. Treasury Department to sanction Iran’s media broadcast company, the Islamic Republic of Iran Broadcasting, and its director.
Perhaps more damaging for Iran is a provision Obama signed into law last summer but which is slated to go into effect next month. Under the threat of losing access to the U.S. financial system, this provision prohibits countries purchasing Iranian crude from transferring their payment to Iran directly or through a third-party, instead requiring that these funds be deposited and kept in banks located in the purchasing country and used only for legitimate purposes.
However, any satisfaction the West takes in the tactical success of the sanctions must be tempered by their inability to achieve the strategic end of forcing major Iranian concessions on its nuclear program. Tehran did offer a goodwill measure last summer by converting a substantial part of its stockpile of 20% enriched uranium into proliferation-resistant fuel plates for use at the Tehran Research Reactor.
Furthermore, Iran has expressed an interest in returning to talks with the five permanent members of the UN Security Council and Germany (P5+1) later this month, although there is little optimism that anything significant will come of these talks. According to Al Monitor, the P5+1 has only slightly sweetened the offer it made to Iran during the last round of talks back in June, in which it asked Iran to address almost all of its concerns at the onset in exchange for immediately allowing Iran to purchase spare parts for its against civilian aircraft and unspecific future sanctions relief in areas like oil exports. Unsurprisingly, Iran refused to accept these terms and there is little indication it is now willing to do so, with President Mahmoud Ahmadinejad calling on the country this week to reduce its dependence on crude exports.
Meanwhile, it seems increasingly apparent that the Western powers do not have a well-thought out endgame for the sanctions regime, short of Iran capitulating completely. In this sense, the sanctions against Iran are not only increasingly similar to the ones imposed on Saddam Hussein’s Iraq during the 1990’s, but also to the U.S. surge in Iraq that failed to achieve its political objectives despite being militarily successful and dramatically reducing violence. Indeed, with regards to current Western strategy towards Iran, one’s tempted to invoke David Petraeus in asking: “Tell me how this ends.”

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