LOS ANGELES, July 18 – International sanctions against Iran are hurting the economy of the Islamic Republic, according to analysts of the London-based Economist Intelligence Unit. But they also say that sanctions alone will be not enough to persuade Tehran to end its alleged program to develop nuclear weapons.
That view emerged in a series of questions posed by Watching World Energy Publisher Eric Watkins, who spoke with EIU analysts led by Peter Kiernan, along with Caroline Bain and Edward Bell. The complete Q&A follows.
Q: There are a number of sanctions regimes now being imposed on Iran. Could you give us a quick run down of them all, when they were begun, what specifically they each are targeting and how effective they are?
A: U.S. sanctions on Iran’s oil and gas sector have been in place for some time. Presidential executive orders ban the import of Iranian oil to the U.S., and prohibit U.S. investment in Iran’s energy sector. U.S. legislation identifies penalties for non-U.S. energy firms investing in Iranian oil and gas. In 2012 Iranian banks blacklisted by the E.U. were precluded from the Brussels-based SWIFT electronic payments system. The E.U. in January 2012 banned its refiners from buying Iranian oil, but this did not take effect until July 1 to allow refiners time to secure alternative supplies. As of July 1 the E.U. has also banned European insurance companies from offering protection and indemnity (P&I) ship insurance for tankers carrying Iranian oil. This action is far-reaching as London-based insurers reportedly cover more than 90% of the worldwide tanker market.
Q: On July 1, the E.U. imposed its latest round of sanctions. Remarkably, very little was said in the media. Oil prices did not seem to show any effect. And life seemed to go on as though nothing had happened. The Iranian issue seems to have gone off the radar screen. Any observations why?
A: I’m afraid I don’t agree with the premise of the question. Oil prices (dated Brent) may not have moved much on July 1 but they have risen from $88/barrel (bbl) on June 21 to over $100/bbl on July 4. It is hard to believe that none of the price increase was as a direct result of the E.U. embargo (and further U.S. sanctions) coming into effect and reports of sharply lower Iranian oil exports, South Korea’s inability to find insurance for tankers carrying Iranian oil, fewer purchases from Japan, and cutbacks from other buyers.
Part of the reason that there may not have been a step change reaction on July 1 was the fact that the E.U. embargo was not new news; it was announced at the beginning of the year and since then we have seen European countries switching suppliers in order to be able to meet the stipulations of the embargo. China has been securing deals ahead of the E.U. and U.S. sanctions and a number of barter agreements between Iran and other markets, such as India.
Q: The Iranians themselves insisted that the latest round of sanctions will be as ineffective as the earlier ones. What really is the score on that? What signs do you see that the sanctions are or are not biting into the Iranian economy?
A: The sanctions on Iran’s financial system have had a clearly visible impact on the economy. The Iranian rial sharply fell earlier in the year and required the government to set a new minimum rate for the currency and increase interest rates. The E.U. ban on providing insurance for cargoes of Iranian crude has also led to normal buyers of Iranian cutting back on their purchases, which appears to have led to Iran cutting back on production and therefore dragging on economic performance in 2012.
Q: How much oil does Iran normally produce in a day, a month, a year? How does their production look year-on-year from a year ago? More important, where do their exports stand at the moment?
A: In 2011, Iran produced 3.58 million barrels per day (b/d) of oil on average. We estimate that it was able to export around 2.33 million b/d last year. The most recent data for June shows Iranian production falling to 3.2 million b/d. Clear data for exports is not available but it appears from tracking Iranian vessels that they have been exporting significantly less than last year. We expect exports to drop off considerably to around 1.33 million b/d for 2012.
Q: How effective have the Saudis and other Gulf Arabs been in bringing additional supplies to market in place of lost Iranian oil? Have the Saudis and Gulf Arabs played a key role in the current crisis? If so, how key has their role been?
A: Saudi Arabia has significantly raised output this year with production hovering around 10 million b/d for almost all the second quarter (this compares with an average of 8.4 million b/d of production in 2010). There have been additional small increases in output in Kuwait and the U.A.E. However, these increases have pre-empted the expected loss of Iranian oil; Iran’s production has been slipping but the full impact of the sanctions will only be felt in terms of significantly lower production in a few months time when forward purchases have been delivered and the country has run out of available storage or options to export.
Saudi Arabia and its Gulf allies have played a role in the fall in oil prices in the second quarter. Their additional production (coupled with slow consumption growth) led to high global stocks and allayed some of the oil markets’ worst fears. I don’t see their role to date as “key”; it remains to be seen whether GCC countries will be able to play a more significant role in physically replacing any loss in Iranian output.
Q: Some observers have noted that Iran has filled its onshore storage with oil, and that a large percentage of its oil tankers are now full of produced but unsold oil. How much storage do the Iranians have, and is the speculation correct that they are running out of space? If the Iranians are running out of storage space, what then becomes of the country’s output of oil? Is output already declining? Is there any chance that the country will have to shut in its fields for the lack of buyers for its oil or the lack of space in which to store it?
A: Oil production has been declining since the end of 2011. Much of this may be to do with a lack of export markets and not enough storage capacity. However, Iran’s oil sector is suffering from high levels of underinvestment and even before these new sanctions were announced we expected production to decline over the next five years.
Q: The Iranians claim they are not worried about the newly imposed E.U. sanctions, insisting that they can sell their oil in a number of other locations. How correct is that claim? Who else is buying Iran’s oil these days? What other countries are likely to take up the oil now shunned by the E.U.?
A: Asian customers are still buying Iranian oil, although South Korea has stopped buying oil in July on account of not being able to access insurance for tankers, because of E.U. measures. Japan will not buy any oil in July, but will resume purchases in August, albeit at a lower level than usual. Turkey and South Korea have cut back for July fairly significantly, while India and China less so. Overall Iran’s exports could drop by about 1 million b/d, being a combination of lost E.U. exports and the cumulative reduction of exports to Asian customers.
Q: The Iranians claim to have sufficient financial reserves – about $150 billion – to withstand the financial pressure of international sanctions. How true are their estimates of their worth? Assuming they are correct, how long would $150 billion enable them to hold out?
A: Iran has not published clear data on the level of foreign reserves for several years and $150 billion seems rather high. Furthermore, they will likely have drawn down on some of their reserves this year in order to prevent the currency collapsing any further.
Q: The Iranians have threatened to close the Strait of Hormuz, shutting down all exports of oil from the Gulf region. How likely are they to make good on that threat? How long would the Iranians be able to keep the Strait shut, assuming they could shut it in the first place?
A: We do not expect the Iranians to follow through on this threat, as it would shut off their major export route as well. If Iran did attempt to shut the Strait of Hormuz it would escalate tensions considerably and could result in a direct military clash with either the U.S. or its allies who have pledged to keep the Strait open. In order to effectively shut the Strait, they would need to either mine it or sink vessels to act as a bloc. That would require several weeks before it could be cleared for commercial traffic.
Q: What would be the effect on world oil supplies and prices if the Iranians were able to shut the Strait of Hormuz for a week? A month? A year?
A: About a third of the world’s seaborne oil passes through the Strait of Hormuz and around 20% of global oil production (not to mention huge amounts of LNG from Qatar and NGLs). Were the Strait to close for a week – oil prices would probably spike into previously uncharted territory – only to come back down when the Strait reopened. (There are a few pipeline options for GCC exports but volumes would be relatively small). If the Strait were to close for a month, however, the consequences would be much more serious – stocks would be quickly run down and strategic reserves would be released. If the closure was to drag on (an unlikely event), global economic output would be severely curtailed.
However, possibly even more serious that the closure of the Strait would be if military action surrounding the closure led to attacks on oil installations belonging to Persian Gulf exporters– leading to the permanent (or at least for a considerable time) loss of supply.
Q: Some observers argue that the current level of sanctions is not sufficient to dissuade the Iranians from pursuing their alleged goal of creating a nuclear weapon. There are calls now for a much more stringent strategy, including an ultimatum that Iran comply fully with all UN Security Council resolutions on its nuclear program or the U.S., E.U. and any like-minded countries will use all means necessary to halt Iran’s international commerce.
A: We expect Iran will continue to pursue its nuclear program regardless of the pressure the sanctions have placed on the economy. There would be little enforcement capability to pressure Iran to fall in line with U.N. sanctions short of a military strike, which currently seems unlikely.
Q: How likely are the Israelis to launch a preemptive attack on Iran? What is the redline moment for any Israeli attack? How closely do you believe Israel and the U.S. are coordinating their policies on Ian? Is it at all possible that Israel would launch an attack without any forewarning to the U.S.?
A: We still do not expect a unilateral Israeli strike against Iran. It would be difficult for the attack to be effective enough to damage Iran’s nuclear program in the long term and would prompt Iran to encourage its allies in the region to launch attacks against Israel, such as Hizbullah in Lebanon or Hamas in the Palestinian Territories. Israel would also need the support of the U.S. to carry out the operation, which currently remains unlikely. The ‘red line’ for an attack would probably be an event like Iran kicking out the IAEA observers, meaning the world would be effectively blind to Iran’s nuclear program. However, this would likely make the U.S. more likely to support an attack against Iran.
Q: How likely is it that the Iranians will capitulate to international demands and it halt its current program for the development of nuclear weapons? Do you believe the current levels of sanctions will be sufficient for that or do you believe the international community will have to impose more stringent measures? If more stringent measures, what would they be and at what point should they be imposed?
A: We do not currently expect the Iranian regime to change tack on the nuclear program. It believes that enriching uranium and pursuing the nuclear program is its national right under the NPT (Non-Proliferation Treaty) and will not offer a concession as a precursor to negotiations. The current sanctions will mean Iran’s economy will struggle in 2012-13 but is unlikely to affect policy on the nuclear program. Short of a military strike against Iran, we do not believe there will much pressure the international community could put on Iran to change its program.
Q: What precisely would be necessary for the international community to end its sanctions against Iran? How willing would the West be to compromise with Iran? What form would such a compromise take?
A: The U.S. and its allies have insisted Iran stop enriching uranium in order for an easing of sanctions to be even considered. The U.S. in particular appears uninterested in offering any compromise to Iran and we do not expect one to be forthcoming.
© Glamma Productions Inc 2012