Iranian oil sanctions – whose problem is it?

This article was written by Rob Minto for the Financial Time blogs on July 16, 2012. Rob Minto is a writer/editor on the FT’s emerging markets desk in London.

The last few days have seen a fresh wave of US sanctions against Iran, in an attempt to put the brakes on its nuclear programme. But cutting off Iran’s oil – its biggest export – isn’t easy.

Chart of the week takes a look at which emerging markets are affected the most.

Iran is a big oil exporter at 4,321 thousand barrels per day in 2011, or 5.2 per cent of the world’s output. It also has the fourth biggest reserves of any country, with 9.1 per cent of global proven reserves.

So sanctions on Iranian oil clearly will have a big effect on world oil. However, looking at Iran’s main oil export destinations, and how reliant they are on Iran’s oil for their supply shows how this is a situation that impacts emerging markets more than developed countries.

Simply put, if a major importer of Iranian crude abides by the sanctions, it’s a problem for Iran. But for any country that relies on Iran for a significant proportion of their oil, sanctions even more of a problem.

The chart below shows countries plotted by the proportion of Iranian oil that they import, and by how much Iranian oil makes up their supply. It’s clear that the biggest problems for Iran are China, Japan, India and South Korea. But switching off Iran’s oil is a big headache for South Africa, Turkey and Sri Lanka, all of which rely on Iranian oil heavily.

Source: EIA, Global Trade Atlas. Data is for 1Q 2011.

According to the FT, earlier in June the US granted exemptions to more than a dozen countries including the emerging markets of India and Turkey, but hesitated over whether or not to give a waiver to China, according to diplomats, before agreeing a last-minute exemption.

So what can countries do when faced with a restriction on Iranian crude?

Miswin Mahesh, commodities analyst at Barclays, tells beyondbrics: “The market is tightly balanced, with elevated OPEC production matching the call on OPEC crude in the second half of this year.” Also, as several emerging markets buy Iranian crude at a discount, finding other suppliers is not only tricky, but will also be more expensive.

The discounts are significant. Back in April, Iran was offering a handful of potential customers in Asia, including India, 180 days of free credit – at the time, the equivalent of a 7.5 per cent discount. Turkey pays about $6 a barrel less for Iranian oil than Brent crude, according to a recent Goldman Sachs report.

Peter Hutton, analyst at RBC, points out that there are other costs too. We may think of oil as a commodity, with one barrel of oil being much like another, but different oil supplies have their own characteristics. As a result, “engineers on refinery sites get worried when faced with another oil. You have to tweak the unit to accommodate the new supply, so there is an inbuilt resistance to change the refinery set-up.”

In which case, any configuration changes now would make it harder for Iran to get its oil into the market should sanctions ease later on.

Iran, for its part, has tried to keep the oil flowing, by disguising tankers with new names and flags. As Mahesh says, “once you stop an oil field, it’s very costly to restart it again.”


The Iran Project is not responsible for the content of quoted articles.