Tehran Threatens to Deprive Europe of Oil for a Long Time

Russia will not get any dividends because it cannot offer the EU its own oil instead of Iran’s.

Members of the Iranian Parliament prepared a bill to impose an oil embargo on the EU. Thus, Tehran is planning ahead. If the European Union plans to place an embargo on Iranian oil imports to the EU starting on July 1, 2012 in compliance with the expiration of existing agreements, the Iranians, though, are going straight forward. Even though this action will cause difficulties for Europe, the Iranians themselves might create even more problems.

If the Iranian authorities decide to impose an embargo, it will immediately lose around $600 million a day at the price of $100 per barrel because the EU receives a daily shipment 500-600,000 barrels, according to Vladimir Sazhin, an expert from the Institute of Oriental Studies. Furthermore, if Iran were to impose sanctions immediately, it would have to pay fines on all existing agreements. The total amount of all the fines may be hundreds of billions of dollars. However, even if an agreement is reached, it is not clear how Tehran will be able to pay because the Iranian Central Bank has been sanctioned.

Surely there is the Asian market, where the Islamic Republic has strong positions. For example, Iran is China’s major supplier, though there is hardly any talk about increasing supply above existing volumes.

No one can buy 600,000 barrels right away, which will be available after terminating agreements with the EU, according to Vladimir Sazhin. Since January 1 of this year, China has cut the amount of its future supplies due to a drop in need.

Japan, whose total imports include ten percent of oil from Iran, has reduced this amount due to pressure from the United States. South Korea, which also imports ten percent from Iran, can reduce its consumption based on a similar reasoning. So far, only India has retained the same volume of purchases. According to different estimates, over 65-85 percent of Iran’s budget ($508 billion) is based on oil revenues. Supplies to the EU make up around 20 percent of the total amount of oil exports. Thus, either Tehran will have to reduce production, or think of what to do with extra oil. According to the general director of the Center for Modern Iranian Studies, Radzhab Safarov, the country has huge reserves to keep the unutilized production, though it is not clear for how long they can last.

Meanwhile, according to Iranian thought, the EU has to suffer huge losses, but will most likely get passed this crisis. Europe can hold out for quite some time on its strategic reserves, says the director general of the National Energy Security Fund, Konstantin Simonov. Truthfully, the main consumers of the Iranian oil are the countries of Southern Europe that are suffering the most economically right now. Over 68 percent of hydrocarbons from the Islamic Republic goes to Greece, Italy and Spain; however, Simonov thinks that Brussels redistribute all of the European reserves in order to support the members. Saudi Arabia and other countries of the Persian Gulf that are hostile to Tehran will have to compensate the shortage of the Iranian hydrocarbons as they promised sometime after.

Iran’s decision is just the reaction to the EU’s sanctions; this confrontation will not lead to anything good, says Foreign Minister Sergey Lavrov. Sanctions in most cases are counterproductive. It may seem that Russia could benefit from the upcoming crisis by increasing oil supplies to Europe, considering that the Iranian heavy crude is very similar in its composition, but there is no such possibility right now.

We have nothing to offer to the European market in terms of increasing our supplies, says Konstantin Simonov. Production is practically not growing. Besides that, we will deliberately increase exports to Asia and decrease to Europe. According to the expert’s opinion, we are reaping the fruits of our own export policy, being unable to provide a suddenly appeared demand. We are not producing more because we do not want to, but because we cannot, says Simonov. As opposed to OPEC, Russia doesn’t have reserves, and everything goes straight to the market.

The situation may change, however, if the Iranian military closes the Strait of Hormuz, connecting the Persian Gulf with the ocean. In this case, it will be possible to talk about the global crisis, and Russia can make money on costly oil.