Iran oil sanctions pour money into the Gulf
Gulf countries could be cashing in on higher oil sales as a result of sanctions imposed by the West on Iran. Noor Toorani reports.. Millions of dollars have reportedly been pouring into the GCC from increased oil sales since an international embargo was imposed on Iran in July, according to Bahrain-based experts.
They reported a clear market shift with Gulf countries taking up the slack to meet global demand for oil after the US and European Union (EU) implemented a raft of economic sanctions targeting Iran's crude exports.
Asian nations have also significantly reduced oil imports from Iran as part of an international effort to ratchet up pressure on Tehran over its ongoing nuclear programme. It means that millions of barrels of oil that would otherwise have been purchased from Iran is now being supplied by refineries in the GCC, raising the spectre of economic meltdown and growing street protests in the Persian state as commodity prices increase and people lose jobs.
"There has been a very marked market shift of trading," confirmed Bahrain-based Well Flow International chairman and chief executive officer Paul Kesterton, whose company provides an integrated worldwide network of services and products to the oil and gas industry.
"You can't take a million barrels of crude oil out of the market and not replace it somewhere else, otherwise the price of crude oil today would be $150 a barrel instead of $112 a barrel. "So the biggest winning supplier in this adjustment has been Saudi Arabia, but there are others. "I am sure Kuwait and the UAE have been pumping up marginally more in order to pick up the slack.
"The sanctions have affected the distribution of income in the region, so Iran is getting less and the Arabian Gulf is getting more. "Every dollar that Iran doesn't get has to go somewhere else and that dollar is coming to this side of the Arabian Gulf.
"Also, the demand overall is down as a direct result of the international recession that is affecting every country, including the high oil demand of countries such as India and China."
The EU agreed on an oil embargo against Iran on January 23, but it was delayed until July 1 to give Greece, Spain and Italy enough time to find alternative supplies. The decision was significant and led to others following suit.
In March, the world's largest secure financial messaging system - the Society for Worldwide Interbank Financial Telecommunication (SWIFT) - cut off all ties with Iranian banks, effectively preventing them from making international transfers.
The move, accompanied by sanctions on Iran's Central Bank, was significant and caused it to look East for alternative buyers for its oil.
"If you can't freely transfer international exchangeable currencies through the banking system, then you will have to find immitigable ways to do it alternatively," added Mr Kesterton.
"Can it be done? Yes. But does it make life much more difficult? Yes. "And will people charge you for doing these different types of exchanges? Yes. So its another cost of capital to Iran."
Mr. Kesterton said the EU's decision to remove insurance cover for all Iranian crude oil transfers had significantly hindered Tehran's efforts to find buyers for its oil.
"The EU's oil embargo was twofold," he explained. "It was extremely significant because first of all southern Europe is a buyer of Iranian crude oil, which has been cut or is being cut because sometimes these contracts get phased over time. "But the other significant embargo was the removal of insurance on any Iranian crude oil cargo. Ninety-five per cent plus of all crude oil cargo worldwide is insured in Europe and that's just been removed, so that has a huge impact because your ordinary trader is not going to take a risk on a 30 to 100 million tonne crude oil cargo without insurance.
"So now the Iranians have to go and find that alternative insurance. "Can they find it? Absolutely they will find it, there is always a place in the market for somebody to come up. "But what is the consequence of that? It is going to be much more expensive."
The largest importers of Iranian crude oil pre-July were China (20pc), Japan (17pc), India (16pc), Italy (10pc) and South Korea (9pc). However, China's crude oil imports from Iran fell nearly a third in July from an 11-month high in June as the world's second largest oil consumer met the terms of a waiver from the US on financial sanctions.
China bought 1.93m tonnes of Iranian crude in July, equivalent to about 454,500 barrels per day (bpd), against 632,618 bpd in June, according to China's General Administration of Customs.
"China is significant, but let us not forget about South Korea, which has just cancelled all imports of Iranian crude oil and that's about a quarter of a million barrels a day, which is about half of the Chinese total," said Mr Kesterton.
"Japan is also cutting back radically and has not announced it will cut out all, but it is certainly cutting back and they are at a similar size to South Korea in terms of volumes. "And other countries are cutting back or taking advantage of the Iranian problem.
"India is another significant buyer. Although Asia isn't following the embargo to the extent that North America and Europe are doing, some have followed it and some are certainly taking economic advantage. "So again, the critical impact is on Iran."
Mr Kesterton predicted it was only a matter of time before the economic sanctions resulted in mass protests on the streets of Tehran. "If you start cutting out a million barrels of crude oil a day of sales out of Iran, that's on average terms $32 billion a year and that's a huge amount of lost income," he explained. "But it doesn't stop there because what they have left then they have to sell at a discount.
"There is a lot of bartering going on between Iran and India and Iran and China, so they are getting paid in goods rather than cash. "It certainly doesn't give you sugar and rice and what's more important is that the third party buyers of Iranian crude oil know well that Iran is having trouble selling its crude, so they are striking very deep bargains with Iran - so Iran is not getting the full international price even on its remaining sales.
"And as the sanctions bite, the amount of money they will receive on a barrel is going to go down because if you are an independent refinery in Asia you are going to negotiate like crazy with the Iranians to get the best possible deal you can.
"The Iranians are going to suffer and over the next six months, by around Christmas, there is going to be a significant impact on the Iranian budget and you can't sustain the level of spending unless you have the income to do it.
"We will see inflation as prices rise rapidly, we will see a scarcity of commodities as a reflection of that and that's when we will start seeing protests on the streets because when food prices rise significantly, wages are cut, money is scarce and jobs start to go - that's when people will start to go out on the streets - not as a political protest, but as an economic protest."
The US Congress in July overwhelmingly passed a new package of sanctions against Iran that aim to punish banks, insurance companies and shippers that help Tehran sell its oil.
The legislation builds on oil trade sanctions signed into law by President Barack Obama in December that prompted Japan, South Korea, India and others to slash their purchases of Iranian oil.
International Institute for Strategic Studies (IISS) research analyst and project co-ordinator Dina Esfandiary said it was in Asia where Iran would really feel the pinch.
"The problem is that Iran's biggest buyers are not in Europe but in Asia. This is where US efforts have paid off," she explained. "Although the US has issued waivers to certain countries, including India, South Korea and now China, they have been issued following significant reductions in purchases.
"Add to these the ban on European insurance to tankers carrying Iranian oil and the impact is actually quite significant. "In June, the International Energy Agency estimated that countries importing Iranian oil had bought nearly BD1m less crude from Iran in April and May than in late 2011.
"So sanctions are biting by crimping oil exports leading to the devaluation of Iranian currency and making it harder for companies and Iranian elites to move money."
The sanctions are designed to put pressure on Iran to curb its nuclear programme, although Tehran denies that it is seeking to develop nuclear weapons as Western nations claim. "Sanctions have succeeded in slowing the Iranian programme down," added Ms Esfandiary.
"Iran was largely dependent on foreign suppliers in the past and stringent export control regimes have been useful in curbing the programme's advance to a certain extent. "But Iran has become increasingly self-sufficient and today their nuclear programme has advanced significantly - the most obvious example being Iran's ability to enrich (uranium) to 20pc, a step closer to the 90pc needed for a weapon.
"The problem is that sanctions will not affect Iran's calculation to pursue its nuclear programme. "Instead, the current trend will continue: stronger sanctions will come into effect, they will further destabilise the country and might even make it more aggressive, but they are unlikely to change its current stance."