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Taking on Tehran and the development of nuclear weapons

Are sanctions really the way the way to stop Iran?

The idea is to drive the “hassle factor up”, says Mark Dubovitz, executive director at the Washington, DC-based Foundations for Defense of Democracies (FDD). Cut Iran’s oil exports, runs the argument, deny its regime access to international trade, starve its economy of cash, and it will drop what Western governments claim is a programme to develop atomic weapons.

Dubovitz and the FDD are the stars of this show. EU governments have accepted their thesis that oil receipts are sustaining Iran’s Revolutionary Guards and keeping the nuclear dream alive. Backing up the FDD’s argument in European capitals earlier this year was a delegation from Tel Aviv, which arrived after the lobby group to warn diplomats in Europe that unless serious sanctions were put in place, Israel would have to strike at Iran, soon. Things were getting urgent, said Israeli defence minister Ehud Barak at the end of January, just as the EU was passing its new sanctions (which will come into effect in July). “The Iranians continue to advance, identifying every crack and squeezing through. Time is urgently running out.”

Frightened about being drawn into regional war in the Middle East, and determined to calm Israel, the EU is now “ideologically committed” to its new sanctions against Iran’s oil, says one diplomat. The US has upped the ante, too, tightening its own embargo. The two-pronged approach, directly targeting Iran’s oil sales and ability to get income from exports, has been welcomed by Israel and lobbyists like the FDD. The sanctions, concedes one Western diplomat, probably won’t stop Iran developing the bomb. But they might delay Israel’s decision to drop any.

Follow the money

What sanctions don’t seem to be doing, however, is having much of an impact on Iran. True, Tehran has agreed to re-open some talks about its nuclear programme. But that’s considered a delaying tactic. Meanwhile, if the US and EU were looking for a way to enrich Iran at the expense of Western consumers, the sanctions strategy would take some beating. Brent crude prices have risen by a fifth, or about $20 a barrel, since December, when the market digested news of the coming embargo. Iran exports around 1.8 million barrels a day (b/d) of crude, so the price surge has been a boon for its treasury, earning it nominal extra revenue of around $1 billion a month.

This tidy stream of sanctions bonus cash would naturally end if the measures really begin to bite. The International Energy Agency reckons that the embargo could remove up to 1 million b/d of Iran’s oil from the market after July. That would severely exacerbate other problems in the country’s economy, not least a weakening rial (making imports pricier) and falling investment.

Whether it comes to that, however, is debatable. Iran is reshuffling its customer base, but hasn’t lost sales volumes yet. According to data from theInternational Energy Forum’s Joint Organisations Data Initiative, an oil-production transparency programme, Iran’s oil sales in January rose to their highest level since December 2008.

Crude exports probably won’t keep rising, but the sanctions may have far less of an impact than the IEA predicts. Saudi Arabia believes Iran’s sales are likely to fall by only 200,000 b/d, according to a source close to the Saudi oil ministry. Tehran has already developed methods to accept payment for its oil that would skip the embargo and its expulsion from Swift, an international communications system for banks.

Barter arrangements and discount deals have been thrashed out. Iran has offered a delayed-payment programme to some customers, allowing importers to pay for their crude up to six months later, says a source. The scheme, once interest is taken into account, is worth about $1.20 a barrel per month’s worth of credit, Petroleum Economist has learnt.

Meanwhile, the list of countries that will continue to trade in Iran’s oil looks longer by the day. China, India and other Asian importers won’t abide the Western rules. Indeed, Beijing has cannily used the sanctions to hammer out better terms from Iran.

The sanctions themselves are also looking flaky. The US State Department said on 20 March that it would exempt 10 EU countries from the rules. Many were already taking little oil from Iran, but Greece – a major importer that other Gulf states, including Saudi Arabia, deem too great a credit risk to supply – may continue to do so. Japan can, too. A source told Petroleum Economist that the White House was now seeking just a 25% drop in Iranian oil exports.

If the US is softening its position, it is because the risks to the oil market of a bigger interruption in supplies have grown obvious. If it worked, a full embargo would spike crude prices. And, points out Paul Stevens of Chatham House, a UK think tank, that assumes that Iran won’t retaliate by attacking its oil-producing rivals in the Gulf, threatening the Strait of Hormuz, or further destabilising southern Iraq, where new infrastructure should soon yield new supplies.

Those are threats too big for President Barack Obama to ignore as rising gasoline prices begin to trouble his re-election hopes. A release of crude oil from the US’ Strategic Petroleum Reserve is one option on the table as the White House tries to engineer lower pump prices. But preventing the Iran issue from destabilising the American – or global – economy could be tricky. “The rising price of oil is a new threat that could derail the recovery,” said the IMF’s boss Christine Lagarde on 19 March. An Iran-induced spike would bring “serious consequences”.

Saudi to the rescue?

If there is a simpler way out of the dilemma, it probably rests in the Gulf. “Saudi Arabia is the absolute lynchpin in all this,” said one Western diplomat, referring to US efforts to keep Iran in check, and Israel satisfied, without spiking the oil price. US and EU envoys have repeatedly sought the kingdom’s help. Now Saudi Arabia, reluctant to be seen profiting at Iran’s expense, looks ready to do so. On 20 March, its oil minister Ali Naimi tried to calm the market, saying his country’s production, already just shy of 10 million b/d, could rise by 2.5 million b/d if needed. As for Iran, if anyone believed it would shut the Strait of Hormuz, Naimi said: “I will sell you the Egyptian pyramids.”

Those efforts to talk down the market had only a fleeting impact, with Brent shedding $1.59/b in London to just over $124/b. But the kingdom’s actions may prove more lasting. Aramco is sending tankers laden with crude to the US, where imports of Saudi oil are rising sharply, and has commissioned new drilling to boost longer-term supply. It’s a concerted effort to soften what Naimi said were “unjustified” high oil prices – and prevent them from damaging global economic growth and oil consumption.

Analysts say Saudi Arabia is also filling its international storage facilities. That could indicate that the kingdom is preparing to plug a supply gap later in the year, when the sanctions take effect.

But it could also suggest the opposite: that the market is loosening as high prices bite demand. “They just aren’t getting the pull on their oil at the moment,” says a source briefed by the Saudi oil ministry. And new Saudi supplies could hit the market just as North Sea outages end and demand data, which always lag production numbers, confirm that consumption is weakening. If that helped bring a correction in oil prices, it would boost Western economies while hitting Iran’s revenue stream.

In other words, the market may do what sanctions don’t seem able to.

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