Special Guest Article
Oil Spikes, Iran and Sanctions Written by Nigel Kushner, CEO,Whale Rock Legal
With the onset of robust international sanctions against Iran we may well see oil spikes over the coming months as tensions rise. Since 24th October 2010, the EU has banned the export of named oil and gas related products and technology to Iran. On January 23rd 2012, the EU announced a ban on the import, purchase and transport of Iranian crude oil and petroleum products, including related financing and insuring. In order to allow buyers of Iranian oil an opportunity to make alternative arrangements, the ban will not kick until 1st July 2012.
One school of thought says that by agreeing a 6 month lead in, the EU are doing no more than firing a shot across the bows of Iran in the hope that they will see sense. Another says that there was concern an immediate ban would result in Iran closing the Straits of Hormuz – something which would cause an immediate oil crisis and possibly, military conflict. The EU could not stomach this prospect.
Who currently buys Iranian oil? Estimates are as follows: China: 549,000 bpd / EU (Greece, Italy and Spain): 50,000 bpd / Japan: 341,000 bpd / India: 330,000 bpd / South Korea: 244,000 bpd / Turkey 182,000 bpd / South Africa: 98,000 bpd / Taiwan: 33,000 bpd / Sri Lanka: 39,000 bpd
The EU: The EU ban will be a blow to Iran if it comes into force in July – although those EU entities who currently receive Iranian oil in lieu of outstanding historic debts (for example, ENI of Italy) will benefit from an indefinite carve out.
US Pressure: The US has recently been “doing the rounds” trying to persuade other buyers of Iranian oil to cease doing so. These buyers would be wise to listen carefully because the US has the right to sanction those entities (and their banks) and ultimately deprive them of their ability to access the US financial system. Japan and South Korea will likely reduce their purchases but China and India are showing no signs of relenting. The US has bigger fish to fry in its relationship with China and India and appear unable to force the issue. We believe the US will now shift its strategy and instead seek to persuade China, India and others to seek discounts from Iran. With fewer buyers in the market this should be eminently achievable and punishes the Iranian economy.
Impact on Iran: In its latest comprehensive assessment of the Iranian economy, the IMF estimated energy exports would amount to $103 billion to the fiscal year end (March 20, 2012), some 78% of total exports. It has been mooted that Iran might have to sell its oil at a discount of 10–15% to find buyers under sanctions. Assuming a 15% discount applied to all shipments and a further expected 10% cut in overall shipments, Iran's energy export earnings would shrink by around $24 billion. The difficulties in finding banks to pay Iran will result in the increased use of costly middlemen in Asia and neighbouring states which have not signed up to tough sanctions. We shall also see greater use of barter deals. Ultimately, we may see Iran enter into a recession.
The IMF estimated Iran would post a budget surplus of about 2.8% of GDP this fiscal year; the fall in oil revenues, combined with an expected 10% cut in tax receipts due to a slower economy, could convert that into a deficit of over 2% of GDP next year. The Rial has fallen by some 40% against the Dollar in recent months and life is becoming harder for Iranians.
Oil Spike? The big worry is that domestic discontent could encourage Iran to “up the tempo” in its aggressive attitude to the West in a desperate bid to unite the Iranian people. It is difficult to see Iran giving in and even more difficult to see the US standing by and allowing Iran to continue its nuclear development foray. This will be a critical factor in the price of oil in 2012. As a minimum, we expect the war of words resulting in occasional short- lived oil spikes. At its worst, a full blown conflict would see the oil price rocket.
Nigel Kushner is CEO of Whale Rock Legal, a legal practice specialising in International trade and natural resources. You can contact Nigel directly using:
nigel.kushner@whalerocklegal.com
Drillers and Dealers :::
::: February 2012 Edition
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