In advance of their adoption on 1 July, EU sanctions against Iranian crude imports have already driven Iran’s oil exports to ten-year lows.
According to the International Energy Agency (IEA), which advises consumer countries on oil policy, Iran’s crude production tumbled by 50,000 barrels per day in February.
Sanctions have accelerated the rate of Iran’s oil production decline, which has long struggled against international restrictions. The country’s industry is also plagued by labour disputes, nepotism and mismanagement, and has become increasingly hostile to its few remaining international partners under the tenure of Oil Minister Rostam Qasemi.
The latest round of sanctions has been largely anticipated by European markets, with the Iranian government confirming that both Shell and Total has discontinued lifting oil, but the full impact of the measures are predicted to exacerbate supply issues. Unplanned outages from Syria, Yemen and South Sudan have added to a squeeze on oil supply in advance of the sanctions taking effect.
Earlier this week the IEA forecast that, when implemented, the EU sanctions could see 800,000-1 million bpd wiped off global oil markets. This amount would present an economic catastrophe to Tehran, which relies on oil for half its income, and be difficult for oil markets to bear without a significant price spike, one that would be largely self-inflicted by consumer countries.
The original intention to the EU measures was to restrict the price Iran could garner for its crude, not the amount it could sell, in a bid to punish the country for its non-compliance with nuclear proliferation treaty inspections obligations which ensuring the effect on oil markets was minimal.
The design of the sanctions regime appears to have changed mid-stream, after intense US lobbying of Asian importers to cut their calls on Iranian crude, and a ban on central bank transactions and insurance contracts seems to have given the current measures a wider effect that originally envisaged..
The prospect of a price spike – Brent is trading at $124.70 a barrel today – has serious implications for US President Barack Obama’s re-election hopes in November and for the economic recovery in the United Kingdom, which is particularly vulnerable to high oil prices because a high amount of its goods and food supplies are imported. In response, Obama and Cameron discussed a release from the Strategic Petroleum Reserve during Cameron’s visit to the US, according to a Reuters report.
Concerns have been emanated from less usual sources, as fears creep in that the high oil price will lead to demand destruction.
“If you look at the peak in U.S. oil consumption it was about 21 million barrels a day as little as about three years ago,” Chevron CEO John Watson told Reuters. “It’s now down to about 19 barrels a day … and high prices are partially contributing to that.”
Saudi Oil Minister Ali Al-Naimi says the Kingdom is ready to meet market needs “real or perceived,” and is already pumping 9.8-10 million barrels per day, the most in around 30 years. Saudi holds almost all of OPEC’s swing supply, which has been cut to less than 2 million barrels per day on IEA figures. Moreover, the cause of the price rise may make put the problem out of OPEC’s reach.
“People keep looking for OPEC to somehow fix everything, but it’s out of OPEC’s hands,” said Sadad Al Husseini, founder of consultancy Husseini Energy and former head of E&P at Saudi Aramco told the National. “It’s a much bigger problem than OPEC. It’s not a shortage of supply, it’s insecurity that is driving up prices. You cannot go around rattling sabres and talking about bombing and expect the rest of the world to march on calmly.”
