(Reuters) – U.S. lawmakers are embarking this summer on a campaign to deal a deeper blow to Iran’s diminishing oil exports, and while they are still working out the details, analysts say the ultimate goal could be a near total cut-off.
Such an extreme goal would risk antagonizing China and India, the biggest remaining buyers of Iranian crude, and could push oil prices higher in a hit to the global economy.
Iran denies its nuclear program is aimed at building a bomb, but skeptical Western powers have become increasingly frustrated and Israel has said it could take military action if diplomacy and sanctions fail to rein in Tehran’s nuclear ambitions.
Both parties in the U.S. Congress are pressing for tougher sanctions, betting that a resurgence in U.S. oil output and signs of ample global supply will prevent prices from rising.
Last month, during a House of Representatives committee meeting on a bill toughening sanctions, a new clause was inserted that for the first time would require importers to cut purchase of Iranian crude by a specific volume: 1 million barrels per day (bpd) within one year.
But here’s the catch: Iran’s crude exports already fell to 700,000 bpd in May, raising questions about what the starting point for such a target would be.
The new language has yet to be incorporated into the official text of the bill and may change. At the hearing, lawmakers said the measure was meant to cut shipments by two-thirds, suggesting last year’s 1.5 million bpd export was the starting point and 500,000 bpd the goal.
But some energy experts said there was growing momentum in Congress behind a push to cut Iranian exports even further – as close to zero as possible.
“The new twist is that Congress wants to drive all or nearly all remaining oil off the market, with the debate centering around how fast,” according to Bob McNally, head of consultancy Rapidan Group and a former White House energy adviser to President George W. Bush.
So far, he says, oil traders have yet to tune in to what could be another drop in production by this time next year. Brent crude at around $104 a barrel is hovering near its lowest levels of the past year, showing no sign of the alarm that greeted sanctions a year and a half ago, traders say.
There is overwhelming Congressional support for action to choke funding to Iran’s nuclear program.
“Congress has been uncommonly unified about confronting Iran and is now acting more urgently since time for sanctions to work is running out – faster than the market realizes,” says McNally. On the same day as the House debate, the Senate voted 99-0 on a resolution urging Obama to support Israel if it attacks Iran’s nuclear facilities.
The House’s “Nuclear Iran Prevention Act of 2013”, largely an effort to amend and toughen existing sanctions, passed the House Foreign Affairs Committee by a unanimous voice vote on May 22 and is expected to easily pass the full 435-member chamber, where it already has about 340 co-sponsors.
A defined measure of cuts in oil exports – rather than the vague “significant reductions” required by the initial legislation passed in late 2011 – may survive in the Senate.
“It’s very possible it could find its way into the final product,” a senior Senate aide said.
Daniel Sternoff, senior managing director at Medley Global Advisors, a consultancy which advises hedge funds and investors, said he expects “a pretty significant volumetric requirement” in the bill. “This is really throwing the entire kitchen at Iran,” he said.
Several analysts said a final bill could be approved as early as August, though others in Washington do not expect action until the fall.
NOTHING AT ALL?
While Congress has long led the charge on getting tough on Iran, the State Department has urged a measured path.
It is not in the U.S. interest to cause any importer economy to “tank” because of the sanctions, Wendy Sherman, the State Department official leading talks with Iran over its nuclear program, told a Senate hearing on Tuesday. “We are all interdependent.”
President Barack Obama is expected to talk about weaning Beijing away from Iranian oil when he meets Chinese President Xi Jinping this week.
China buys about half of Iran’s crude exports. It has joined in the international effort to reduce its purchases, but whether it will be willing to go further is the key question.
India accounts for around a quarter of Iran’s exports, while Turkey buys around one eighth.
“If you ask for too much too quickly from countries like China, Turkey and India, you risk getting nothing at all,” says Jason Bordoff, professor and director of the Center on Global Energy Policy at Columbia University and a senior White House energy advisor until late last year.
Even if tougher new curbs are imposed, exports would likely dwindle but not disappear, says Sternoff.
Oil exports of 500,000 barrels per day or less would force Iran to shut in more oil wells, potentially causing problems for some of the country’s oilfields, said Mehdi Varzi, a former official of the National Iranian Oil Co.
“Iran will not be able to thrive on 500,000 barrels a day of oil exports. The government is surviving, but its domestic budget is facing an unprecedented squeeze,” said Varzi, who now runs an energy consultancy in Britain. “But will that be enough to tip Iran into negotiating?”
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