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Iran: The Squeeze Begins

United States President Barack Obama gave the go-ahead on Friday for the tightest sanctions yet against Iran's oil industry.

world Updated: Apr 01, 2012 02:16 IST
Washington Post
Washington Post
Hindustan Times

United States President Barack Obama gave the go-ahead on Friday for the tightest sanctions yet against Iran's oil industry. In a statement from the White House, Obama said he decided that though oil supplies are tight, there are enough non-Iranian supplies to allow countries to reduce imports from Iran.

The new sanctions target the Central Bank of Iran, the financial institution that processes payments for nearly all of Iran's foreign oil sales. One provision, set to take effect June 28, imposes sanctions on any foreign bank or company that continues to engage in oil transactions with the Iranian central bank.

The financial pain will only increase in the months ahead. The White House has formally certified that global oil supplies are sufficient to accommodate deeper cuts in Iranian oil imports, a technical step that clears the way for the implementation of even tougher economic sanctions set to take effect three months from now.

US officials say the threat of harsher sanctions - combined with a European oil embargo scheduled to begin July 1 - is already costing Iran billions of dollars in lost revenue as the country's traditional customers begin to turn elsewhere for petroleum. At the same time, administration officials and oil analysts say they are increasingly confident that Saudi Arabia and other suppliers can make up for Iran's shortfall, easing the risk of global shortages and further price spikes.

The new measures are intended to pressure Iran into agreeing to strict curbs on its nuclear programme at negotiations set to begin in Istanbul in mid-April. Western officials are describing the talks as a last best chance for a diplomatic settlement of an Iranian nuclear crisis that has driven up oil prices while spurring fears of military strikes.

The price of Brent crude rose 49 cents Friday to finish at $122.88 per barrel.

The US will take punitive measures against any country that fails to reduce oil imports from Iran. These countries include China and may include India and South Korea.

Washington accepts that this is an electorally risky move, something acknowledged by vice-president Joe Biden who said on Thursday night that Obama's re-election chances could be scuppered by events in the Persian Gulf. "I don't think we'll be beaten by those [Republican] candidates," Biden said. "I think we'll be beaten - if we are - by something happening in the Eurozone or something happening in the Gulf, which could be difficult for us."

The administration's decision to press forward with deeper sanctions highlights the political risks confronting President Obama. Sharp cuts in Iranian oil could drive energy prices higher within the US, alienating middle-class voters upon whom Obama depends for reelection.

At the same time, a failure to back painful sanctions against Iran could invite attacks by the president's Republican rivals while also raising the risk of a unilateral military strike by Israel against Iranian nuclear facilities.

Israel is publicly threatening to launch an air strike against Iran's nuclear facility. The Obama administration says it is pressing Israel to hold back on an air strike to allow sanctions to work.

Tehran could react in two ways: by retaliating or by caving in, suspending its uranium enrichment programme that the West says could lead to a nuclear weapons capability.

The administration has granted waivers to 11 countries that have agreed to end or sharply reduce oil imports from Iran, and its diplomats are encouraging Iran's remaining customers to agree to similar cuts. On Friday, Turkey, a major consumer of Iranian oil, announced that it would slash Iranian imports by 10%.

Already, the cuts have had an impact on Iran's economy and its currency, the rial. The pressure will soon become "greater than anything Iran has faced before," said the senior administration official. "It is already far beyond what anyone anticipated two years ago," the official said.

Many oil analysts predict Iran's exports could eventually fall by half, amounting to 1 million barrels per day, as the July embargo by the European Union kicks in as well. Iran's exports fell by 300,000 barrels daily in March, according to the Swiss oil-shipping firm Petro-Logistics.

Saudi Arabia has increased production by about 600,000 barrels per day since October, making up for much of the shortfall, and the US Energy Information Administration estimates OPEC spare capacity was at about 2.7 million barrels per day. While that's fairly low by historical standards, there are signs it might be enough for now.

From Iran's end, the biggest calculation to make is whether the drop in exports will hurt more than the benefit it is gaining from rising oil prices as tensions flare. Last year, thanks to increasing prices, the country earned an estimated $97 billion from oil sales, according to the International Monetary Fund.

Yet a recent Reuters analysis found that Iran could see its oil revenue cut in half, by $50 billion, if exports fall to 1.5 million barrels a day and it has to sell some of its oil at a discount. Iran presently exports about 2 million barrels a day.

"If Iran really is forced into halving its exports, that changes the cast of negotiations" with the United States, Sarah Emerson of Energy Security Analysis said. "But the sanctions only work if everybody's on board."

In an exclusive partnership with the Washington Post.

First Published: Mar 31, 2012 22:54 IST