U.S. officials have lauded the growing international support for an embargo of Iranian crude oil, but it remains to be seen who beyond the European Union will embrace the boycott.
India, China and Turkey, who collectively soak up about 42 percent of Iran’s oil, have rebuffed the embargo, which energy industry experts say will be hard to implement and likely trigger a spike in global oil prices this summer.
“These are not U.N. sanctions, so there’s no international regime that says India, China or someone else couldn’t buy the Iranian crude, refine it … and then resell the products,” said Edward C. Chow, a senior fellow with the Center for Strategic International Studies’ energy and national security program.
“We’ve seen leakages of embargoes in the past,” said Michael Wittner, who heads global oil market research for the investment firm Societe Generale in New York. “Given the right incentives, someone is going to break the rules.”
Mr. Chow, Mr. Wittner and others say the U.S. and EU-backed sanctions could bite hard enough to bring Iran to the negotiating table on its nuclear program. But other nations’ participation in the embargo is yet to be seen.
Still, reports this week indicate that Iran’s parliament is weighing a 5 percent cut to the nation’s budget. In a speech on state radio, Iranian President Mahmoud Ahmadinejad said the government is seeking to reduce its dependence on oil revenues.
Figures from analysts and the International Energy Industry show that a full-scale embargo by the EU’s 27 member countries would result in a 25 percent cut in the roughly 2.5 million barrels per day that Iran sells globally.
A truly steep cut to Iran’s ability to profit from its oil exports would come if the embargo were to be embraced by China, which buys about 550,000 barrels a day, or India, which buys about 310,000 barrels a day. Both countries have said they can’t afford to reduce the amount of oil they buy from Iran.
Turkey, which buys about 195,000 barrels a day from Iran, is showing little appetite for the embargo.
Meanwhile, Japan and South Korea, who together buy about 555,000 barrels of Iranian crude a day, have signed up for the embargo, in part. Representatives of both countries met with officials in Washington this week to determine how much Iranian crude they might be allowed to buy without violating the sanctions.
Industry analysts say some nations - particularly U.S. allies like Japan, South Korea and India - are seeking to cut deals in which they agree to make small reductions in Iranian oil purchases in exchange for assurances from Washington that they won’t get pinched by the sanctions.
The sanctions authorize penalties, such as barring access to U.S. banks, against foreign firms doing business with Iran’s energy sector and central bank.
“There are a lot of ways out,” said Bhushan Bahree, senior director of global oil at IHS Cambridge Energy Research Associates. “I don’t know where the negotiations with South Korea and Japan might be for what they might need to do to qualify for a waiver.”
The Obama administration remains steadfast saying the sanctions are enforceable, will inflict the intended hurt on Iran’s economy and will allow little wiggle room for countries to negotiate a way out of the boycott.
“If foreign banks are still doing business with the Central Bank of Iran for oil purchases after June 29, they risk losing their access to the U.S. financial market, if the country they are based in has not significantly reduced its oil imports from Iran,” a Treasury Department official told The Washington Times.
Analysts say the embargo will trigger a surge in global crude oil prices, which were trading Thursday at about $112 per barrel.
According to Mr. Wittner, most market operators believe Saudi Arabia, holder of the world’s largest oil reserves, will fill any gaps in oil flow created by the boycott. The catch is that increased Saudi output will have an impact on the Saudi Arabia’s overall spare capacity.
“That’s what’s bullish for the oil markets because oil markets look very much at spare capacities,” Mr. Wittner said. “As we see Saudi exports go up and their spare capacity go down, I think there’s a good chance that we’ll see oil go a $125 type of range.”
With the EU’s embargo slated to go into effect in June, the ripple from such a price increase could cause a jump in U.S. gasoline prices this summer. That likelihood is creating something of a paradox for U.S. officials now traveling to globe in to persuade others to join the embargo.
“The more successful you are in shutting in Iran’s oil, the more pressure you might put on prices,” said Mr. Bahree. “People say we could get the oil from somewhere else, yes, but to the extent we do, the spare capacities that help in stabilizing the market may be impacted, and this could have an adverse effect on prices.”