Asia Puts the Oil Squeeze on Iran

Published Tue, Feb 21st, 2012   Martin Denholm

Would you expect anything other than stubborn defiance from Iran?

While many believe Iran poses a threat to the world with its nuclear enrichment program, Iran says, “No, no, we’re just doing it for our own power generation.”

Entirely unconvinced, the United States and its allies are tightening the screws on Iran. They’re imposing stiff sanctions on oil imports from the country, in order to cut off the flow of foreign money to the Iranian regime.

Iran’s response: “Go ahead… we’ll just shut down the Strait of Hormuz.” (The Strait is a narrow channel that transports about one-fifth of the world’s oil.)

And when the European Union slapped an embargo on Iranian oil imports, Iran promptly banned oil sales to Britain and France – a rather petulant, unnecessary gesture, given that a more widespread EU ban on Iranian oil imports comes into effect on July 1 and both Britain and France have had contingency plans in place for a while now.

But Iran might have to start taking the situation a little more seriously, given the latest moves from Asia…

An Asian Offensive

According to Reuters, China and India are about to trim their oil imports from Iran by 10% – news that Iran simply can’t afford to shrug off.

Why? Because the two emerging markets are the biggest importers of Iranian oil. Combined, they buy 45% of Iran’s oil exports.

In China, one of the country’s two largest oil importers, Unipec, will chop its Iran oil purchases by 10% to 20%. As a whole, Iran will lose around 15% of imports from China alone. That’s a stark contrast from 2011, when China boosted its Iranian oil imports by 30%.

India will also reduce its Iran oil imports by about 10% to 15% up to March 2013. That’s a big step, given that Iran satisfies almost 15% of India’s oil demand.

Not only that, Reuters says purchases of Iranian oil from East Asian nations are poised to hit a six-month low.

So what about Asia’s other heavyweight – Japan?

Japan’s Diplomatic Dodgeball

The country faces a delicate situation.

On the one hand, it certainly doesn’t want to break rank by not siding against Iran with other Western nations and power players. Particularly since the United States has said it will make life pretty miserable for countries that continue to deal freely with the nation.

But on the other hand, Japan doesn’t want oil sanctions against Iran to stifle its own economy. The country was already heavily reliant on oil imports before last year’s earthquake and tsunami crippled the country’s nuclear power generation. But in the wake of the disaster, it’s now even more dependent on foreign oil to prop up its ailing economy.

In short, negotiating a way around the U.S. sanctions against Iran is paramount – and that’s exactly what it’s been trying to do. According to Japan’s Yomiuri newspaper, the country is close to agreeing to a waiver deal with the United States that would result in Japan cutting its Iran oil imports by 11%, in return for an exemption from the official sanctions.

It will be interesting to see how Iran responds to such coordinated international pressure against its oil market. But don’t ask me to get inside the mind of Iranian leader, Mahmoud Ahmadinejad, or figure out what his motives are.

The truth is, Iran has had nuclear ambitions for many years. Whether it’s for power generation, or something more sinister… who knows? The problem is, Ahmadinejad certainly isn’t the cuddliest, most moderate character on the face of the planet, though, so it means tensions are cranked higher.

The bottom line here is that as the second-largest oil producing nation in OPEC, Iran needs money from its oil exports. But it clearly wants to develop its nuclear program, too, no matter what the West thinks about it, or does about it.

It’s a high-stakes political poker game that looks set to rumble on and promises to be one of the key foreign policy issues in this crucial election year.

Best regards,

Martin Denholm