Can Europe – or for that matter, the world - live without Iranian oil?
That’s the question as the continent’s leaders gear up to impose an embargo on oil from the Islamic Republic.
Iran warns Gulf states not to replace its oil
Can EU oil sanctions create a turning point in Iran?
'Saudis have enough oil to make up for Iran'
Iran accounts for less than 5% of the world’s petroleum production, for
many key economies the Islamic Republic’s oil is critical to keeping
vehicles and factories running and homes heated. It supplies 11% of
China and India’s needs and 10% of Japan’s. Overall, Europe is far less
reliant on Iranian oil, but Greece, Italy and Spain, three of Europe’s
weakest economies, depend heavily on Iranian crude.
analysts are pretty close to a consensus that an embargo can be
successfully imposed without creating energy bottlenecks or causing
prices to spike.
“The shortfall could be made up with increased
production from Saudi Arabia, and Saudi Arabia would be happy to do that
because of the tensions between Saudi Arabia and Iran. There aren’t two
countries - apart from Iran and Israel - that hate each more,” Julian
Jessop, chief global economist at London-based Capital Economics, told
The Media Line.
But just as important a factor in the
supply-and-demand calculation is the likelihood that European demand for
petroleum will go down this year as its debt crisis spins into a
generalized economic slowdown, said Jessop. “Europe might need less oil
than last year because of the recession,” he said.
As US Treasury
Secretary Timothy Geithner was making the rounds in Asia to drum up
support for sanctions, the Organization for Economic Cooperation
Development reported that its composite leading indicators, which point
to changes in the direction of the economy, continued pointing to a
slowdown in activity in most member countries, notably China and the
Oil prices have been rising amid what many observers say are fears that a
sharpening war of words between the US and Iran may cross the line into
military or other action that would hit oil supplies coming from Iran
and/or its Gulf neighbors. But a Goldman Sachs report on Thursday
discounted Iran fears and attributed higher oil prices to improved
economic prospects in the US and China.
“The market remains focused on the improving economic outlook rather
than on the risk that the Iranian tension escalates into a severe supply
shortage,” David Greely, head of energy research, said in a note.
The sanctions campaign is gaining momentum amid concerns by Western
powers that that Iran is moving closer to acquiring nuclear weapons.
Although Tehran maintains that its program is for peaceful purposes, it
announced this week that it started to enrich uranium at its Fordo
production facility to a level of 20%.
On Thursday, Japan became the latest country to line up behind US-led
sanctions campaign, saying it would cut imports of Iranian oil. The
European Union is scheduled to consider a ban on Iranian crude imports
when the bloc’s foreign ministers meet on January 23. US President
Barack Obama signed into law at the end of last year measures that block
foreign lenders doing business with Iran’s central bank from accessing
the US financial system.
Beijing this week turned down a plea by Geithner to cut back, but China
has reduced crude purchases from Iran for January and February in a
dispute over contract pricing terms. Last year, China purchased close to
a quarter of Iran’s oil exports. While analysts say China is interested
in getting a better price from Iran, the tactics will cut purchases by
about 40% for the two months.
The Paris-based International Energy Association (IEA) estimates that
Saudi Arabia has the capacity to produce as much as 12.5 million barrels
per day (bpd), about 2.5 million more than it is producing now. That is
about equal Iranian export levels, which are approximately 2.6 million
Moreover, Saudi Arabia’s spare capacity mimics the kind of oil Iran
produces, heavy sour crude, so a transition for importers from one
supplier to another will not entail any upheavals, analysts said.
The Saudis stepped in to replace an oil shortfall earlier this year when
revolution in Libya cut off the North African country’s exports. Riyadh
is fearful of Iranian nuclear and military ambitions, and officials
have signaled they will do their part in the campaign to stop Tehran.
But Paul Stevens, a senior research fellow for energy at Chatham House, warned that the Saudis may disappoint.
“They have ability to replace it [Iranian oil], but there is question in
my mind if they would be willing to replace it,” Stevens told The Media
Line. “They will be concerned about upsetting the Iranians. They are
deeply suspicious of the US following the way US government ditched
Mubarak. I must add that I have some sympathy with that.”
Riyadh was deeply upset when Washington urged Egyptian President Husni
Mubarak to leave office after mass protests erupted against his rule
nearly a year ago. Like Saudi Arabia’s ruling Al-Saud family, Mubarak
had been a key US ally.
A Reuters report on Wednesday
cited unnamed Gulf sources as saying that
Saudi Arabia is nearing its comfortable operational production limits at
10 million bpd and might struggle to do much to make up for shortages
that arise from new sanctions on Iran. But most analysts said the IEA
estimate is likely correct.
Without Saudi help, the world would be hard-pressed to find enough oil
to replace Iran’s, said Stevens. The United Arab Emirates has space
capacity of about 200,000 bpd and Kuwait has some as well. After quickly
recovering to 150,000 bpd, Libyan production growth has leveled off as
its struggles to fix war-related damage.
“In a way, it’s the Saudis or nothing,” he said.
In any case, Europe’s ban on Iranian oil is likely to come into force
slowly because Italy, Spain and Greece cannot afford another blow to
their already troubled economies. Reuters cited EU diplomats as saying a
consensus was emerging that the sanctions would come into force after
six months and the petrochemical product ban after three - similar to
provisions in US legislation.
“I think the transition would be smooth,” said Capital Economics’
Jessop. “We’ve been talking about sanctions for a long time and there
has been time for parties to prepare. They could also in the short-term
draw on strategic reserves. The idea that the world will be different
from a day before is a bit naive.”