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Asia
is Purchasing Nearly all of Iran’s Oil
Four
Asian countries are now purchasing nearly all of Iran’s oil exports
according a report this week from the Economist’s Intelligence Unit
(EIU)
5
January, 2013
.
“Almost
all of Iran's oil exports now go to China, South Korea, Japan and
India,” the report said even as it noted a sharp decline in the
amount of oil each country purchased from Iran during 2012.
Iran’s
oil exports have been cut in half as a result of U.S. and EU
sanctions that were enacted last year to pressure Tehran into making
concessions on its nuclear program, which the West believes is aimed
at acquiring a nuclear weapons capability but Iran claims is intended
solely for peaceful purposes.
Oil
exports make up 80% of Iran’s total export earnings and 50-60% of
government revenue according to the EIU report. Iran’s government
budget for the current fiscal year ending in March forecasted oil
exports of 2.2 million barrels a day (b/d). The International Energy
Administration (IEA) recently estimated sales of around 1.1 million
b/d, resulting in monthly losses of $5 billion for Iran according to
a widely cited estimate. The sanctions and the Islamic Republic’s
habitual economic mismanagement have also combined to send Iran’s
currency plunging in value over the last six months.
With
many of Iran’s oil customers bowing to Western sanctions, Iran’s
dependence on the four Asian countries has grown substantially.
Tehran has become especially dependent on China, which has long been
its primary trading partner. Still, China is now estimated to
purchase roughly 50% of Iran’s total oil exports despite having
decreased its oil imports from Tehran by 23% year-on-year through the
first 11 months of 2012.
India
has similarly seen its reliance on Iranian crude decline sharply,
with year-on-year imports down 17% in the first 8 months of 2012.
Indian officials have also suggested they plan to cut imports by an
additional 10-15% in 2013.
Both
South Korea and Japan reduced their oil imports from the Islamic
Republic by around 40% in the first 11 months of 2012 and pledged
further reductions in 2013. Seoul has implied it could decrease its
year-on-year imports by as much as 20% through the first six months
of this year ending in May.
A
U.S. sanctions bill signed into law by President Obama on December
31, 2011 cuts off access to the U.S. financial system to any entity
conducting business with Iran’s central bank—which is the
country’s primary mechanism for processing oil payments—along
with other large Iranian banks. The legislation does allow the Obama
administration to grant three-month renewable waivers to countries
that continuously reduce their crude purchases from Iran. China,
India, South Korea, and Japan have been granted two waivers since the
sanctions went into effect in July 2012.
Meanwhile,
the EU passed a boycott that prohibits any member state from
purchasing oil from Iran. More burdensome for Iran, EU sanctions also
prohibit European maritime insurance companies—which dominate the
industry—from insuring oil tankers carrying Iranian crude, which
has forced Iran to cover the insurance costs itself in order to
convince its few remaining customers to continue purchasing crude.
These remaining customers have also demanded significant price
concessions from Iran in order to continue their economic relations
with the Islamic Republic, reducing the revenue Iran receives on the
oil it can sell.
The
situation is only likely to worsen for Iran in the months ahead. To
begin with, global energy trends and continued sluggish economic
growth make it easier for Western nations to sustain the sanctions
without causing a spike in energy prices.
In
fact, the U.S. continues to strengthen the existing sanctions regime.
Early this week, President Obama signed into law the National Defense
Authorization Act, which for the second straight year included rider
provisions sanctioning Iran. Besides strengthening sanctions in the
existing areas of energy, shipping and shipbuilding sectors, the new
bill seeks to restrict Iran’s trade in precious metals, graphite,
aluminum and steel, metallurgical coal and certain types of
commercial software, according to the Wall Street Journal. The bill
also directs the U.S. Treasury Department to sanction Iran’s media
broadcast company, the Islamic Republic of Iran Broadcasting, and its
director.
Perhaps
more damaging for Iran is a provision Obama signed into law last
summer but which is slated to go into effect next month. Under the
threat of losing access to the U.S. financial system, this provision
prohibits countries purchasing Iranian crude from transferring their
payment to Iran directly or through a third-party, instead requiring
that these funds be deposited and kept in banks located in the
purchasing country and used only for legitimate purposes.
However,
any satisfaction the West takes in the tactical success of the
sanctions must be tempered by their inability to achieve the
strategic end of forcing major Iranian concessions on its nuclear
program. Tehran did offer a goodwill measure last summer by
converting a substantial part of its stockpile of 20% enriched
uranium into proliferation-resistant fuel plates for use at the
Tehran Research Reactor.
Furthermore,
Iran has expressed an interest in returning to talks with the five
permanent members of the UN Security Council and Germany (P5+1) later
this month, although there is little optimism that anything
significant will come of these talks. According to Al Monitor, the
P5+1 has only slightly sweetened the offer it made to Iran during the
last round of talks back in June, in which it asked Iran to address
almost all of its concerns at the onset in exchange for immediately
allowing Iran to purchase spare parts for its against civilian
aircraft and unspecific future sanctions relief in areas like oil
exports. Unsurprisingly, Iran refused to accept these terms and there
is little indication it is now willing to do so, with President
Mahmoud Ahmadinejad calling on the country this week to reduce its
dependence on crude exports.
Meanwhile,
it seems increasingly apparent that the Western powers do not have a
well-thought out endgame for the sanctions regime, short of Iran
capitulating completely. In this sense, the sanctions against Iran
are not only increasingly similar to the ones imposed on Saddam
Hussein’s Iraq during the 1990’s, but also to the U.S. surge in
Iraq that failed to achieve its political objectives despite being
militarily successful and dramatically reducing violence. Indeed,
with regards to current Western strategy towards Iran, one’s
tempted to invoke David Petraeus in asking: “Tell me how this
ends.”
"Big
increases in GCC public spending this year are pushing up break-even
oil prices for some states and raising concerns about the
sustainability of government largesse."
This
has long been predicted. Oil-producing nations need to use more of
their oil themselves, and they need to charge more for exported oil
in order to pay for higher wages, social programs, and other rising
expenditures.
--
Rice Farmer
Gulf
states counting even more on oil price
6
Janurary, 2013
Big
increases in GCC public spending this year are pushing up break-even
oil prices for some states and raising concerns about the
sustainability of government largesse.
In
recent days, Oman and Saudi Arabia have unveiled spending plans for
this year that rely on higher oil prices than last year in order to
balance their budgets.
Oman's
finance minister, Darwish Al Balushi, was quoted by Reuters as
telling a news conference last week that the country required oil
prices of US$104 per barrel this year to break even on a spending
plan of 12.9 billion rials
(Dh123.21bn). He did not give last year's
break-even price but Deutsche Bank analysts estimate it was $91.60
per barrel.
Saudi
Arabia's record 820bn riyal spending target for this year requires a
break-even price of $71 per barrel, up from $69 last year, estimates
Jadwa Investment, a Saudi investment bank.
Economists
expect a similar trend for other GCC budgets this year.
These
break-even levels are still below current prices of $111 per barrel
for North Sea Brent crude. Still, some observers are worried whether
governments will be able to sustain high expenditure levels in the
longer term.
"In
the last four years we have seen a significant increase in break-even
oil prices across the GCC," said Raza Agha, the chief economist
for the Middle East and Africa at VTB Capital. "It's a
reflection of higher current expenditure in wages and salaries."
Increases
in spending in 2011 and last year were supported by rises in oil
output to make up for cuts to Libyan output in 2011 and more recently
for the dip in Iran's exports as a result of international sanctions.
But
this year, oil output is expected to moderate. Saudi Arabia's oil
revenue is expected to dip to 829 billion riyals (Dh811.92bn) this
year, down from 1.24 trillion riyals last year, according to the
country's budget statement.
Oil
prices are also forecast to soften slightly this year from last year.
The
rise in break-even prices is not an immediate concern for most
regional governments.
Many
are traditionally conservative in their budget forecasting,
underestimating revenues for the year.
Most
also have hefty foreign reserves to fall back on, while governments
are also capable of issuing bonds to raise cash. Oman and Bahrain,
considered the most vulnerable to oil price weakness, were promised
US$20bn (Dh73.46bn) in aid from the rest of the GCC in 2011.
Despite
efforts to diversify their economies into non-hydrocarbon sectors,
most of the income of GCC states still flows from oil. Without oil
revenues, GCC governments would be running double-digit deficits,
said Mr Agha.
The
exception is the emirate of Dubai, which depends on oil for only a
fraction of its revenue and draws income from its transport, trade
and tourism sectors. Last week it unveiled an expansionary budget,
with a spending target of Dh34.1bn.
"When
income is primarily from oil proceeds, governments need to be aware
of the vulnerability of budget revenues to changes in oil prices, and
how sustainable expenditure is in this context," said Khatija
Haque, senior economist at Emirates NBD.
In
its latest report in November, the IMF questioned the sustainability
of GCC spending, warning that spending was at levels "inconsistent
with intergenerational equity".
Dubai
has pledged to create 1,600 jobs for Emiratis this year, while Oman
has targeted a further 20,000 posts in the government sector under
its latest budget.
"Generally,
spending on public-sector wages and salaries is less productive than
spending on infrastructure that would support higher economic growth
over the medium and longer term," said Ms Haque.
Still,
many governments have also boosted spending on infrastructure.
"If
you look at capital spending in Saudi Arabia, it has risen from
70.9bn riyals in 2006 to 258bn riyals, that's a huge jump in capital
spending to improve infrastructure will sustain a solid non-oil
private sector growth," said Fahad Alturki, senior economist for
Jadwa Investment.
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