Kate Mackenzie Oil at the heart of latest Iranian sanction efforts

Energy analysts are increasingly pondering the likelihood of sanctions against Iran and what effect this might have on oil markets, given that the country is one of the world’s top crude exporters.

Now that US concerns over Russia opposing sanctions have eased somewhat, the diplomatic focus is on winning support from China for taking a tougher line – and on working out how to make any sanctions effective in hurting Iran’s nuclear development.

As foreign affairs columnist David Ignatius writes in the Washington Post, China is particularly susceptible to oil pressure from Iran, as it imports 540,000 barrels a day from the country. So the US has worked with Saudi Arabia and the UAE to counter this:

The UAE has already boosted its oil exports to China as part of this pressure campaign. Shipments have increased from about 50,000 barrels per day last year to 120,000 now, with a goal by year-end of up to 200,000 barrels. Over the next few years, the UAE is offering to increase that export volume to China to about 500,000 barrels per day, which would nearly equal the current Iranian total.

In addition, as the FT reported last week, efforts to persuade China to support new sanctions on Iran were added to by a delegation from Israel to China.

Ignatius says the inclusion of prominent macroeconomist and Israeli central bank governor David Fischer in the delegation could mean they were trying to explain the effect of Iranian sanctions to China – and even that Israel might be prepared to use military action to enforce such sanctions.

Meanwhile the IEA’s chief, Nobuo Tanaka, referred last week to the west’s ability to cover for Iranian supplies using stocks. In a speech in Greece on energy security, Tanaka said:

Drawing only on the public stocks, which now stand at 1.5 billion barrels, IEA Members could respond to a supply disruption of 2 mb/d, like Hurricane Katrina in 2005, for 24 months. A bigger disruption of 4 mb/d – equivalent to Iran’s annual oil production (or to the supply impact of Iraq‟s invasion of Kuwait) – could be compensated for one year.

China of course is not an IEA member, but it is making efforts to build its own oil stocks.

However as the FT’s Dyer wrote, China has other considerations beyond energy:

Chinese scholars mention that China’s own nuclear weapons capability was achieved in the face of western sanctions. Chinese leaders share with Iran a suspicion of what they regard as western interference in their domestic politics.

Many Chinese observers consider the unrest in Iran to be partly inspired by US interests. China also sees Iran as a future partner in a Middle East in which the US is less dominant.

There is also the added question of China’s Muslim population. After the riots in Xinjiang last summer, China was criticised for its treatment of its Uighur minority by Turkey and by two Iranian ayatollahs.

Given how sensitive Beijing is about political radicalisation of Muslims in Xinjiang by people outside the country, “the incident was a warning to Beijing that it must exercise caution when dealing with Iran’s political and religious elites”, according to a recent report by the International Crisis Group.

Dyer’s report added that one Israeli official voiced optimism over the visit, saying the Chinese hosts had “listened attentively”.

But comments by China’s foreign minister Yang Jiechi on Sunday, reported by Reuters, were much less positive:

“As everyone knows, pressure and sanctions are not the fundamental way forward to resolving the Iran nuclear issue, and cannot fundamentally solve this issue,” Foreign Minister Yang Jiechi told a news conference on the sidelines of China’s annual parliament.

But aside from managing the effect on oil markets, there is the question of making the sanctions effective – an old and challenging issue, as Ignatius notes.

A timely report by the New York Times identified 74 companies that have benefited from US government contracts, grants and other benefits in the past decade while they were simultaneously doing business in Iran, including 18 (at our count) that would firmly count as energy companies. More concerning for those who would want to enact sanctions, however, only 25 of those 74 companies have quit Iran.

Related links:

Israel presses China over Iran sanctions (FT)