Iran Review

Country loses $133m a day as western sanctions bite

Iran is exporting 1.1 mbpd a day of oil, according to the median estimate of 10 analysts, down from an average of 2.3 million in 2011. The lost sales are valued at $133 million a day, based on the 2012 average price of $110.60 a barrel for Iran Heavy crude

US-LED sanctions against Iran are costing Opec’s third-largest producer $133 million a day in lost sales without raising global crude prices, handing President Barack Obama an election year foreign policy victory.

Shipments from Iran have plunged by 1.2 million barrels a day (mbpd), or 52 per cent, since the sanctions banning the purchase, transport, financing and insuring of Iranian crude began on July 1, according to data. Annualised, that would cost President Mahmoud Ahmadinejad’s country about $48 billion in revenue, equivalent to 10 per cent of its economy.

While Iran’s threats to disrupt the flow of oil through the Arabian Gulf sent crude to a three-year high in March, increased production from Saudi Arabia, a US output boom and the slowing global economy have left prices 1.3 per cent lower in 2012. That’s helping Obama avoid steeper domestic fuel costs before the November presidential election. Iran has to contend with a weakening currency and rising unemployment.

“It’s been an unqualified success,” Mike Wittner, head of oil market research for the Americas at Societe Generale, says.

“There were a lot of concerns sanctions could backfire by causing an oil price spike, but in the end the US and Europeans got their cake and they ate it too, because volumes are down and prices are down.”

Voter concern about fuel costs has plunged since Republican Mitt Romney, Obama’s presumptive challenger, called for firing top officials he blamed for rising gasoline prices. In a monthly Gallup poll on the most important issues facing the US, 1 per cent of respondents cited fuel or oil prices in questioning July 9-12, compared with 8 per cent in an April 9-12 survey.

Crude futures in London rose as high as $128.40 on March 1, a rise of 20 per cent for the year, after Iranian officials threatened to order the closing of the Strait of Hormuz.

The Gulf waterway, 34 km at its narrowest, is a conduit for 20 per cent of the world’s traded oil, according to the Washington-based Energy Information Administration.

Prices retreated as Saudi Arabia boosted output. The Organization of the Petroleum Exporting Countries’ biggest producer is pumping more than 10 mbpd, the most in three decades and 22 per cent more than at the end of 2010, according to the International Energy Agency.

The Paris-based adviser to the world’s biggest industrialised economies cut its forecast for global oil use four times this year, to 89.9 mbpd.

Iran is exporting 1.1 mbpd a day of oil, according to the median estimate of 10 analysts, down from an average of 2.3 million in 2011. The lost sales are valued at $133 million a day, based on the 2012 average price of $110.60 a barrel for Iran Heavy crude in Asia, according to data.

Daily output fell 9.5 per cent in July to 2.86 million barrels, the lowest level since February 1990, a survey showed. Iran dropped to third among Opec’s biggest producers, after holding the No 2 spot since May 2000.

Prices of meat, rice and bread have spiralled in Iran as the rial lost a third of its value against the US dollar on the open market since |November.

Inflation accelerated to 22.4 per cent in the 12 months to June 20, |according to the central bank. Unemployment reached 13.5 per cent in March, the Shargh newspaper reported, citing figures from the national statistics bureau. The jobless rate was 11.9 per cent in 2010, according to the International Monetary Fund.

Economic growth will slow this year to 0.4 per cent, from 2 per cent in 2011, the IMF said on July 16. Gross domestic product is expected to accelerate to 1.3 per cent in 2013, with unemployment set to rise over the two next years, according to IMF forecasts.

The global sanctions are “the harshest ever imposed on a country”, Ahmadinejad says. Oil accounts for half of Iran’s government revenue, according to the EIA.

US and EU sanctions have a global reach, thwarting financial transactions with Iran’s state entities and blocking insurance for oil shipments to Asia, the biggest market for Iranian crude. A US law that took effect June 28 threatens to cut access to dollars for any foreign bank settling oil trades with Iran. China, Japan, India and 17 other countries received renewable ‘-day waivers for reducing imports.

Obama announced an executive order extending sanctions to buying Iranian petrochemical products, providing material support to the National Iranian Oil Co or Central Bank of Iran, and acquiring US bank notes or precious metals by Iran’s government. The Treasury Department also said the Bank of Kunlun in China and Iraq’s Elaf Islamic Bank helped Iranian firms conduct transactions worth millions of dollars and blocked the offenders from the US financial system.

Congress is set to give final approval to legislation aimed at preventing Iran from repatriating oil revenue, with measures against everything from conducting oil-for-gold swaps with the country to helping it mine uranium.

The US has limited dealings with Iran since 1979, when militants took 52 hostages at the US embassy in Tehran. The UN levied four sets of sanctions against Iran starting in 2006. None had the teeth to curb sales, and in 2007 the country’s crude exports rose to an 11-year high of 2.6 mbpd, according to Energy Department estimates.

Restrictions on supplying equipment and technology have stymied plans to modernise refineries and develop the world’s second-largest natural-gas reserves.

Iran lacks the expertise to build the liquefaction plants needed to boost gas exports and prolonged sanctions may hurt its ability to maintain and expand oil production, according to Robin Mills, head of consulting at Dubai-based Manaar Energy Consulting and Project Management and a former Iran specialist at Royal Dutch Shell.

The EU ban prevents most tankers from sailing to the country because the global marine-insurance industry is concentrated in London.

All but 5 per cent of the world’s fleet is insured by members of the London-based International Group of P&I Clubs, and the Islamic republic doesn’t have enough ships of its own to compensate, according to Dahlman Rose & Co, a New York investment bank.

China, Iran’s biggest customer and an opponent of sanctions, imported more crude from the Islamic republic in June than it did on average in 2011. The world’s second-largest oil consumer hasn’t sent any tankers, and the government in Beijing hasn’t said if it will insure cargoes.

“The future of Iran’s oil exports hinges on whether China is going to use its own ships,” says Nigel Prentis, the London-based head of research at HSBC Shipping. “That’s what we’re waiting for, because there’s nothing stopping them aside from the insurance issue.”

India, the third-biggest buyer of Iranian oil before the sanctions took effect, will start offering state-backed insurance to tankers carrying the crude. Insurers have agreed to give as much as $100 million of cover per voyage, Shipping Corporation of India’s chairman, Sabyasachi Hajara, says without giving a timeframe.

Japan, the second largest customer, is already providing sovereign guarantees and was scheduled to load a second cargo backed by the state last week.

The US and Europe are pressuring Iran to stop a nuclear programme they say is aimed at developing arms.

Iranian Supreme Leader Ayatollah Ali Khamenei says that the country won’t bow to foreign pressure or sanctions.

“We could be looking at a very significant economic contraction …over the next year,” says Crispin Hawes at the Eurasia Group consultant in London.

“It will take longer to see the impact on Iranian policy. Clearly the government isn’t going to throw their hands in the air and say, ‘You’re right, we give up,’ but undeniably the pressure is going to grow.”

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