Pacific Money

Asia Will Bear the Brunt of New Iran Sanctions

Renewed U.S. efforts to sanction Iran’s nuclear program could jeopardize Asia energy markets.

Asia Will Bear the Brunt of New Iran Sanctions
Credit: flickr/ Johnny Shaw

Renewed Congressional efforts in the United States to sanction Iran’s nuclear program could jeopardize Asia-Pacific energy markets.

Before leaving for August recess last week, the House passed a bill to ramp up sanctions against Iran by an overwhelming 400-20 margin. One of the provisions of the bill, which will need to pass the Senate and be signed by the president to become law, would severely restrict President Obama’s ability to issue waivers to countries that reduce their oil purchases from Iran.

A December 2011 law requires American banks to cut off any foreign financial institution that helps process payments for Iranian oil. That bill, however, allowed the Obama administration to issue six-month waivers to countries that continuously reduce their purchases of Iranian oil. The Obama administration currently offers waivers to numerous Asian countries, including China, Japan, India, and South Korea. The State Department last renewed the six-month waivers in June.

Though the bill the House passed last week would not take away President Obama’s authority to issue new waivers to importers of Iranian oil on a biannual basis, it would require the White House to make fresh determinations on the ability of cleared countries to hit reduction benchmarks within 30 days of the final passage of the bill, and every 90 subsequent days. It also set a much steeper benchmark for reductions; namely, the bill aims to reduce Iranian oil exports by a million barrels a day in a year’s time.

With an E.U. embargo on Iranian oil imports already in effect, the bulk of these cuts would have to come from China, Japan, India, and South Korea to cut deeper into exports. Together, these four countries combine to import nearly all of Tehran’s oil. By seeking to slash Iran’s oil output to 250,000 barrels per day by the end of next year, the bill would force some of the world’s largest petroleum customers to scramble for supplies on the spot market, potentially causing prices to rise, undercutting growth and increasing prices at the pump.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

Experts dispute how significant the upward pressure on the oil price might actually be should the bill pass the Senate after the Congressional recess ends in September. "If it appeared likely that [the] remaining output would be lost rapidly, $125 for Brent crude would likely become the new floor for prices," John Kilduff, founder of Again Capital, told CNBC. That would mean a 15 percent jump from today’s price of US$108.72, according to Bloomberg, although such a rise could be mitigated by the return of new suppliers, such as Libya, to the marketplace.

Others are less certain about the impact the bill will have on its own. “The escalation of Iran sanctions will not result in any significant price move on its own.” Ray Carbone of Paramount Options says. The tenor of the U.S.-Iranian nuclear dialogue will also play a critical role in sending price signals to the market.

Regardless, the United States has already put considerable pressure on countries in the region to reduce petroleum exports from Iran. In the first half of 2013, the aforementioned countries imported 961,127 barrels per day of Iranian oil, down from 1.23 million a year ago, according to Reuters. The largest cuts came from India and South Korea, who imported 43 percent and 27 percent less, respectively. In comparison, Japan slashed imports by 23 percent over the same period of time, but many expect purchases to stabilize over the second half of the year. In total, oil shipments from Iran are down by about 60 percent on average compared with pre-sanction levels, when Tehran exported 2.2 million barrels per day.

With its neighbors already in the hunt for new suppliers, the sanctions would force China, Iran’s largest buyer, to drastically cut imports. "They have cut the least and their cuts have been more token.” Robin Mills, a leading Middle East energy consultant told Reuters. Indeed, official figures indicate that Chinese imports of Iranian crude have only fallen by 2 percent in the past six months. However, Beijing will not budge easily after cutting purchases by 21 percent last year, and has consistently opposed unilateral U.S. and EU sanctions against Iran. Chinese officials expect to cut imports by 5-10 percent from 2012 levels by year’s end.

If the sanctions do stick, pressure on oil exporting countries in the Persian Gulf, including Saudi Arabia, Iraq, and the UAE, will increase. Although China’s imports of crude have fallen from last year, in line with projections of slower economic growth, taking one million barrels off the market each day would still force OPEC members to increase supplies to the Asia Pacific. The cartel may be reticent to do this: China already purchases almost half of the 1.5 million barrels that Iraq produces each day, and has steadily increased its dependence on traditional U.S. allies in the region since the onset of the Arab SpringPurchases from Baghdad have risen by 38 percent in China so far this year, and an additional 27 percent in India.

Asian hydrocarbon customers will increasingly turn their attention to the Western hemisphere, where Canada is attempting to pipe its prodigious tar sands reserves to the Pacific Coast for Chinese, Japanese, and Korean consumers that Prime Minister Stephen Harper has actively attempted to court. China and India are also eyeing oil production in the Orinoco area of Venezuela as a potential stopgap solution, should any further setbacks occur, although production there slid by 1.35 percent in June. The China National Offshore Oil Corporation (CNOOC), is also actively pursuing new oil discoveries of its own, exploring two new wells in the Gulf of Bohai last week. China is also looking into expanding the capacity of its oil pipeline with Kazakhstan.

With or without Iran’s supplies, the fight for energy resources in the Asia-Pacific will continue to intensify.

Andrew Detsch is an editorial assistant at The Diplomat. You can follow him on Twitter: @JackDetsch.