The Obama administration and European governments are seeking help from Arab and Asian allies to reduce Iran’s oil revenues in the dispute over its nuclear program, while trying to avoid causing a surge in prices that may threaten the global economic recovery.
The most wide-ranging effort to date to target Iranian income, the strategy includes a push by France and Britain for an embargo as soon as next month on imports of Iranian oil by the 27 European Union countries. EU nations, the U.S. and Asia- Pacific allies discussed possible measures in Rome yesterday, and vowed to increase pressure on Iran, the world’s No. 3 crude exporter in 2010, to abandon a suspected nuclear weapons program, according to an Italian Foreign Ministry statement.
The Obama administration sent high-ranking officials to Saudi Arabia and Israel in the last few days to discuss targeting Iran’s energy exports, and is developing plans to implement Congressionally-mandated sanctions on its central bank that complicate the international purchases of crude. The U.S. is also urging Japan, the No. 2 buyer of Iran’s oil, to reduce its reliance on imports from the country and discourage refiners from buying the crude by imposing tariffs, according to diplomats and analysts who are in consultation with the administration.
“The ultimate goal is not to take every barrel of Iranian oil off the market, but to significantly decrease the revenue Iran receives for its oil sales,” said Mark Dubowitz, director of the Iran Energy Project at the Foundation for Defense of Democracies in Washington, who has been advising Congress and the administration on targeting Iranian energy revenues.
Oil Prices
The prospect of a European embargo of Iranian crude helped push oil prices higher yesterday. Futures for January delivery advanced $3.34, or 3.6 percent, to settle at $97.22 a barrel in New York. Front-month contracts are at $97.97 a barrel today.
Oil is Iran’s main source of income, earning the country $73 billion in 2010 and supplying more than 50 percent of the national budget, according to the U.S. Energy Department and International Monetary Fund. The second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, Iran exported an average of 2.58 million barrels a day in 2010, according to OPEC.
U.S. officials say they want to target Iran’s oil earnings to force the regime to abandon its nuclear work, or at least reduce funding for missile and nuclear development and terrorist financing. Iran already is under four rounds of United Nations sanctions and separate economic and financial measures by the U.S. and the European Union.
Iran Downplays
Iranian Oil Minister Rostam Qasemi on Dec. 17 downplayed further sanctions, saying the world needs Iranian supply and can’t make up the shortfall, the state-run Fars news agency reported.
The U.S. is “encouraging all of our partners to do what they can to wean themselves from Iranian oil,” Victoria Nuland, a State Department spokeswoman, said in Washington Dec. 19. All measures are being considered “in close consultations with our allies and partners about protecting their legitimate interests, their economic interests.”
Secretary of State Hillary Clinton met Japanese Foreign Minister Koichiro Gemba in Washington on Dec. 19 and “discussed new sources of oil that are coming online -- Iraq, Libya, etcetera -- and about what we can do together to help partners make that transition to more secure supplies,” Nuland told reporters.
‘Causing Damage’
Japan gets 10 percent of its crude imports from Iran, according to the EIA. Gemba told reporters he feared “there is a danger of causing damage to the entire global economy if the imports of Iranian crude oil stop.”
The U.S. is pressing Japan to impose a surcharge on refiners who import oil from Iran, Dubowitz said. The idea is to encourage refiners to seek cheaper crude from other nations or force Iran to cut its prices.
An EU embargo as well as modest decreases in Japanese and South Korean imports from Iran would leave remaining buyers, including China and India, better positioned to wring deep discounts, Dubowitz said.
Already, China Petroleum & Chemical Corp. (600028), known as Sinopec, has cut January purchases from Iran over a price dispute, according to media reports from China. China, India, South Korea, and Turkey have increased imports of Iranian crude this year, according to the U.S. Energy Department.
International Strategy
Iran is advancing on elements of its nuclear program, according to United Nations inspectors. The White House is concerned it is within weeks of enriching uranium at a deep underground facility near Qom, according to administration officials. Used to fuel power plants and reactors, enriched uranium may be further processed into atomic weapons material. Iran says its nuclear program is for civilian use.
The International Atomic Energy Agency detailed nuclear activities that have no purpose other than for weapons, according to a Nov. 8 report. That’s increasing pressure on President Barack Obama from some in Israel and some Republican presidential challengers to consider a military strike. The drive for an embargo and sanctions is part of an effort to force Iran to cooperate with international inspectors and drop the suspect activities, and to forestall use of force, according to diplomats who spoke on condition of anonymity because of the sensitivity of the issue.
‘Whatever Steps Necessary’
The U.S. shares Israel’s determination to stop Iran from acquiring nuclear weapons, Defense Secretary Leon Panetta said Dec. 19
“If they proceed and we get intelligence that they are proceeding with developing a nuclear weapon, then we will take whatever steps necessary to stop it,” he told CBS News.
Gulf diplomats, who spoke on condition of anonymity, said they have reassured the U.S. and Europe of their willingness to increase production to offset the loss of Iranian oil in Europe.
The Congressional sanctions on Iran’s central bank, which need the president’s signature, will go into effect 180 days after becoming law, if the president determines the supply of crude is sufficient to make up the loss from Iran. Obama is to make that determination based on reports to be issued every two months by the Energy Department, according to the legislation.
The legislation allows the president to waive sanctions for national security reasons, and permits exceptions for countries that have significantly reduced purchases of Iranian oil.
Avoiding Price Surge
“If you create a spike in the price of oil, they’re still going to be able to benefit, because they’re selling their oil,” said Dennis Ross, who until recently served as Obama’s special adviser on Iran. The trick is doing this “in a way that the Iranians don’t benefit from,” he said.
The regime will benefit if its remaining buyers are forced to pay higher prices, said Ross, who now works at the Washington Institute for Near East Policy. The key is to keep world oil prices stable while leaving Iran with fewer buyers, he said.
The EU imported 450,000 barrels a day of Iranian oil from January to June, about 3 percent of the region’s needs, according to the International Energy Agency in Paris. The EU accounted for 18 percent of Iran’s oil exports in the first half of this year, according to the U.S. Energy Department.
‘Raises Fears’
“The imposition of any new sanctions raises fears that this won’t be the last,” Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts, said in an interview yesterday. “The specter of increased tension with Iran will continue to be a driver of oil prices.”
There are potential buyers, even though sanctions are having an impact, he said. “It’s becoming more and more difficult to do business transactions with Iran,” he said. “We’ve recently seen that Indian buyers have had problems.”
Options to buy crude at $150 next December are the most popular on the New York Mercantile Exchange, with outstanding contracts numbering 37,834 yesterday, according to data from the Nymex. The number of options increased 11 percent on Nov. 22 as the U.S., U.K. and Canada imposed new sanctions on Iran’s financial system, including measures that may make it more difficult for buyers to pay for crude.
Iran Output
Iran produced about 3.56 million barrels a day in November, according to data compiled by Bloomberg News. That’s more than the 3.12 million barrels a day of spare capacity available among OPEC producers.
“You want to preserve spare capacity in the event of shocks,” Ross said. “If there is a sense that there isn’t spare capacity and you have a shock, then the fact is that you’re going to be bidding up the price of oil anyway.”
U.S. Treasury Undersecretary David Cohen visited Saudi Arabia and Bahrain this week to discuss sanctions on Iran, while U.S. Undersecretary of State Wendy Sherman was in Israel last weekend, when the Middle East country pushed for “crippling sanctions,” including those on oil sales, according to Yigal Palmor, a foreign ministry spokesman.
The U.S. “must act in a way that has the greatest impact on Iran’s bottom line,” Cohen said in a testimony before Congress on Dec. 1. “As we have learned from our sanctions efforts to date, the key to achieving this goal is to bring together an international coalition to work in concert.”
To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Asjylyn Loder in New York at aloder@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
