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UK may join France in call for Iran oil export ban

Crude import sanctions would hit southern European countries hardest

The UK government is studying a plan by French president Nicolas Sarkozy to ban EU-based companies from lifting Iranian crude oil or importing it into the bloc, a diplomatic source said.

But doubts have surfaced about whether the plan, designed to punish Iran for its alleged pursuit of nuclear weapons, will win political support from other EU members, especially struggling economies in the south.

The proposal would also need backing from Saudi Arabia and may backfire on the EU by forcing oil prices higher and pushing Iran to ship more crude oil to Asia, in turn strengthening its ties with China.

William Hague, the UK’s foreign secretary, is “ideologically behind it”, said a source of Sarkozy’s proposal. And the foreign ministry has been asked to build a compelling case to persuade other EU members to back the proposal, which will be put to a vote in the European Council on 1 December.

However, the council, which comprises EU heads of state, must unanimously accept the proposal - and the bloc’s southern countries are unlikely to vote in favour.

Greece, Italy, and Spain all import Iranian crude for processing in refineries. Their governments, already reeling from the sovereign-debt crisis, will not wish to curtail oil imports from a crucial supplier.

European countries imported about 878,000 barrels a day (b/d) of Iranian crude in 2010, according to Opec. The European Commission, the bloc’s civil service, calculates that imports from Iran to the EU’s 27 members accounted for just over 4% of the total in the first three months of 2011 - suggesting the ban would have little impact on its market.

However, southern European countries would be hit hard. About 40% of Greece’s crude-oil imports, which amounted to 411,000 b/d last year, come from Iran. Spain and Italy also depend heavily on Iranian oil, Olivier Jakob, managing editor of Petromatrix, a Switzerland-based oil consultancy, said.

Although France imports 40,000-70,000 b/d from Iran it would not struggle to replace the volumes, said Jakob. The UK, Germany, the Netherlands and other countries that may support Sarkozy’s proposal have no exposure to Iranian crude.

That would make any ban pushed by those countries a token gesture, said Jakob - but potentially painful for the EU’s struggling southern economies.

EU energy commissioner Günther Oettinger brushed aside such worries on 23 November, saying Iranian oil supplies could be “substituted by Opec and others”.

But that is doubtful. Jakob said an interruption in supplies from Iran to southern European countries would require additional supplies from Saudi Arabia or Russia. Saudi Arabia, which tried to plug a gap left when Libyan exports went down earlier this year, accounts for a similar volume of European imports to Iran. But its export strategy is focused on fast-growing economies in Asia.

And the kingdom may be reluctant to divert exports to Europe while Iran, denied access to that market, pushed additional crude cargoes to the east at Saudi Arabia’s expense. Russian exporters, meanwhile, are unwilling to supply Greece because of the country’s poor credit status.

There are also doubts about whether any ban would hurt Iran, or pressure it to abandon its alleged nuclear programme.

Turkey buys 50-70% of its imported crude (342,000 b/d in 2010, according to Opec) from Iran, so the chances that it would back the EU’s proposal are slim. And of Iran’s 2.5 million b/d of crude exports, about twice as many barrels already go to Asia as to Europe. Forcing that proportion higher, conceded one Western diplomat, may reinforce China’s political support for Iran in the UN Security Council.

China’s foreign ministry has already condemned Western plans to impose new sanctions, saying they would not solve the nuclear issue but “complicate and exacerbate it”.

On 22 November, a spokesman for the Iranian foreign ministry said any sanctions would “have no impact on Iran’s trade and economic ties with other countries”.

But a ban on oil imports could backfire on the EU and Western economies. Iran’s deputy oil minister Andolhossein Bayat this week pointed out that such sanctions would “certainly lead to an increase in the price of petrochemical products in the global markets and it might unwillingly be a significant contribution to our foreign exchange revenues”.

Oil markets have already reacted to rising tensions between the West and Iran, including efforts to tighten international sanctions on the country this week. Escalating rhetoric will do nothing to dampen crude prices, which rose on 24 November to around $107.60 a barrel.

Iran has in the past threatened to shut the Strait of Hormuz, through which about a third of the world’s seaborne oil exports float, in the event of an attack on the country.

Fatih Birol, the International Energy Agency’s chief economist, said on 24 November that strong crude markets were already threatening to “strangle” the economic recovery.

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