Oil is very much a geopolitical story, and markets keenly follow the developments on movements to impose sanctions on Iran, one of the world’s biggest oil exporters.
Despite the slow progress of efforts to impose sanctions, more and more companies are ceasing to export gasoline to Iran, which is a net importer of refined products – and this is looking like a key bullish argument for oil prices of late. On Thursday Petronas, Malaysia’s national oil company, said it has stopped exporting products to Iran, and Platts this week pointed out that this has become something of an unofficial embargo of late:
“…the scorecard now lists Lukoil’s Litasco, Shell, Vitol, Trafigura, Reliance Industries and Glencore as companies that stopped selling gasoline to Tehran”.
There are a few reasons for the increasing number of companies pulling back on selling products into Iran, despite a lack so far of actual sanctions, according to JBC Energy:
Apart from political pressure, rising financing and insurance risks are the main driving factors behind this development.
With Iran’s rising demand for oil products, it would seem vulnerable to these sorts of actions. The latest IEA monthly oil market report noted that Iran was one of the six countries that would account for three-quarters of all oil demand growth in 2010 (the other five are China, Saudi Arabia, Russia, Brazil, and India).
Platts notes, however, there are no reports of gasoline shortages in the country – and postulates that intermediaries may be filling the gap. One company still exporting away is Chinaoil, a unit of CNPC. Reuters, citing anonymous industry sources, reports that Chinaoil has sold $55m of refined products to Iran since January 2009. China, meanwhile, imports about half a million barrels a day of crude from Iran. As we wrote last month, oil is a key element in the effort to persuade China to support new sanctions against Iran – although China has political concerns too.
Why are gasoline imports so important to Iran?
Iran’s huge appetite for oil products stems from the country’s generous subsidies on gasoline – even though it has to import most of its refined products due to a lack of refining capacity. Here’s a potted background from IHS Insight’s Middle East analyst Samuel Ciszuk:
Iran-like most of its oil-exporting neighbours-has a long history of subsidising refined products and gas very generously, and the practice has become seen as a national right and a way for the population to share in the nation’s natural wealth. Hence, the political cost of scrapping subsidies is immense and consecutive governments have shied away from it, despite the fact that in the refined products sphere Iran has for decades had to rely on imports at international market levels to fill a domestic refining capacity shortage. Those expensively bought imports are then soaked up by the domestic market, where consumers-who do not have to pay the commodity’s real value-have developed some of the most wasteful consumption patterns in the world. Having the world’s second-largest gas reserves, Iran has nevertheless for the same reason of spiralling domestic demand had to resort to imports to cover domestic shortfalls during the yearly peak demand seasons. Meanwhile, the country is struggling to find investors in its refining and gas sector-especially if projects are for domestic supply-as there is virtually no economy in supplying the domestic market for a private enterprise. Radically higher domestic prices could change that, although international sanctions over the years have made sure that even export projects are suffering from an unwillingness to take the political risk involved in investing in-or selling advanced technology to-Iran.
Whatever the effect of companies pulling back from selling gasoline into Iran, the country has big problems with its energy consumption. So much so that the country’s oil minister signalled a major price hike in natural gas – even though it is rich in this resource, as with oil. As Ciszuk notes, such a move is extremely politically risky. But the government is presumably resorting to dramatic measures, as it has difficulty attracting investment in its own gas production and has to import gas during peak seasons.
Related links:
The downsides of subsidising energy - FT Energy Source
Oil at the heart of latest Iranian sanction efforts - FT Energy Source
