Sanctions hit Iran economy, not nuclear policy

According to Iran’s official sources, oil exports have been unaffected by Western sanctions and remain at their “normal” level. In a statement to the Iranian Students’ News Agency, Mohammad Ali Khatibi, director for international affairs at the National Iranian Oil Company, said that “we don’t see anything abnormal, almost everything is progressing routinely.”

Official production numbers supplied to the Opec (Organisation of the Petroleum Exporting Countries) Secretariat by Iran tell the same story where oil production is reported to be around 3.7 million barrels a day (mbd) since 2010, with minor changes around this number every month till now.

But it is known that the official numbers reported by Opec are strictly for diplomatic purposes and unreliable for analysis. Members have agreed many years ago to let the Secretariat report production numbers according to the average reported by “secondary sources” of reputable industry publications.

According to these sources, Iranian crude oil production, as reported in Opec’s monthly oil market report, has steadily fallen from 3.7 mbd in 2010 to 3.6 mbd in 2011, with sharper decline throughout 2012 to reach the level of 2.767 mbd in August. This pegs Iranian exports to just around one million barrels a day, less than half the number in 2010.

The International Energy Agency (IEA) numbers, as reported in its monthly oil market report, vary slightly from those reported by the Opec, but on average may converge for Iranian oil production at around 2.9 mbd in July.

Exemptions to be reviewed

In looking at these numbers, one has to remember that July is the first month when the US and European sanctions took effect. The European Union (EU) was reducing its imports from Iran since the beginning of 2012 and a full embargo began on July 1, while US sanctions that took effect in July target banks that process oil payments with Iran’s central bank, therefore making things difficult and risky for countries that import oil from Iran. The exemptions given to some countries by the US such as China, Japan, India and South Korea will be reviewed in six months and have been given on the understanding that these countries will endeavour to substantially reduce their imports from Iran.

The situation is further complicated by the lack of insurance cover for vessels carrying Iranian oil as insurance companies are not willing to risk being affected by the US financial sanctions. Japan and India have introduced state‐backed insurance schemes for cargoes of Iranian oil, while Iran announced that it will provide insurance cover for vessels trading into China, South Korea and others willing to lift. It remains to be seen if such a scheme can become credible and encourage lifting.

At the same time, Iran is bypassing its own laws by resorting to, for the first time, allow the private sector to make agreements with foreign buyers. Hassan Khosrojerdi, head of Iran’s oil products exporters’ union, said recently that a private consortium has signed two agreements with foreign buyers to sell about four million barrels of Iranian crude. But Iran’s central bank approval is still pending. Mahdi Qazanfari, Iran’s minister of industry, said that “the private sector can sell oil with lower advance payments and at prices lower than the oil ministry, and its revenues will be returned to the country in cash or in the form of imports of goods.”

Reuters also reported secret crude oil transfer from two Iranian carriers into two storage vessels at the port of Labuan in Malaysia. The volume is reported to be three million barrels and the operation is said to have been conducted without the knowledge of the Malaysian authorities.

Fuel oil exports fall

Equally, fuel oil exports from Iran have fallen 50 per cent in June and are expected to fall further though these are exempt from western sanctions, but not from the financial and insurance barriers. Exports in June were 396,000 tonnes as compared to 777,000 tonnes in May. This has implications for refinery operations as fuel oil surplus may force reducing refinery throughput or force Iran to dump the fuel oil onto its crude streams when possible or lower its price to encourage lifting and smuggling.

Refinery throughput is already not sufficient for Iran to meet its domestic requirements of gasoline and diesel. Iran raised the prices of these products and introduced rationing of gasoline in an attempt to lower consumption, especially because product imports were the first to be targeted by sanctions.

So far, the sanctions on Iran may have exceeded expectations where the internal shortage of products, the rising prices of consumer goods and the loss of revenue from oil exports may impact the economy severely. But all this does not seem to have an impact yet on Iran’s nuclear ambitions and policy.

— The writer is the former head of the energy studies department in the Opec Secretariat at Vienna.