To drive Iran’s oil export to zero, the Trump administration said that it will no longer exempt any countries from US sanctions if they continue to buy Iranian oil, stepping up pressure on Iran in a move that primarily affects the five remaining major importers: China and India and US treaty allies Japan, South Korea, Turkey.
To shed more light on the issue we dissussed it with Omid Shokri Kalehsar a Washington-based Senior Energy Security Analyst.
Here is the full text of our interview with him:
Saudi Arabia and the UAE have announced they will compensate for Iranian oil. Is this possible technically?
Supply and demand is an important factor in the international oil market. The oil market needs increased supply from major OPEC members and non-members such as Russia. It seems that Saudi, the UAE and Iraq with Russia must produce more oil to overcome the shortage of Iranian oil in the oil market. At present major importers of Iranian oil are looking to find an alternative to Iranian oil because the US did not extend the waiver for Iran’s major oil buyers. India and South Korea are importing more oil from the US and also imported more US LNG, refineries from these both countries are adapting themselves to US oil, they previously imported Iranian oil and are now ready to import US oil. Some analysts believe that the Saudis will be faced with the major problem of increasing their oil output by as much as a million barrels; Saudi Arabia’s oil consumption is rising in the warm months due to increased cooling applications and oil consumption rises from 400 to 500,000 bpd.
It is claimed that the other barrier which Saudi Arabia faces in increasing its crude exports is that the government have invested heavily in their refineries and oil products exports over the past years. A unilateral increase in oil output beyond the quotas could impose a requirement for other OPEC members and even eliminate the agreement between OPEC and 10 OPEC non-member countries.
It will possible for Saudi to increase its crude production in the two months of May and June. Saudi Arabia said the country’s oil production in the first quarter of this year would be lower than its country’s quota, which would allow the country to increase production in those two months. It should be recalled that calculating the compliance of OPEC member states with their oil production quotas is carried out over a six-month period, and the average monthly production of these countries in this six-month period is the basis for judging their compliance with their quotas.
In this way, Saudi Arabia could offset Iranian oil exports from markets by boosting its oil production over the next two months. The decision on the quota for the second six months of this year (July to December) will be taken at the OPEC Ministerial Meeting in Vienna, held in June. Thus, eliminating Iranian oil does not necessarily increase oil prices in the global markets. Some Iranian officials have also confirmed this.
In respect with the United Arab Emirates, which has been proposed as one of the alternatives to Iran’s oil market, the country has a production capacity of 3,300,000 barrels per day; its production in 2002 was 2.56 million barrels per day and in 2018 were 3 million and 34 thousand barrels a day. However, according to the latest OPEC announcement, the UAE’s oil production in March 2019 amounted to about 3 million and 59 thousand barrels a day. One million barrels will be provided to domestic refineries, and the rest will also be shipped to the export market.
At present some oil producers such as Libya and Venezuela face tensions and political unrest. Currently, aside from Saudi Arabia and the United Arab Emirates, OPEC has no spare capacity. Of course, the commitment to quotas is an important message for the oil market. On the other hand, OPEC or the Consumers’ Union is also seriously concerned. If major consumers such as China, India or Turkey form an oil consumer organization, America will not be able to cope with them. Most of OPEC’s Middle Eastern countries have focused on Asian markets because the European market has no horizons and the future of the oil market is developing in Asia. In other words, in the current century, they are the largest producers of Asian oil.
The US is making efforts to drive the export of Iranian oil to zero. Is it possible? If not, why?
Even a massive inspection will not prevent the sale of quantities of oil. During the Iraqi oil sanctions , despite the international cooperation in this regard, the country was still able to smuggle some of its oil in various ways, including through neighboring countries. Based on this, the US government largely relied on buyer cooperation and fears of a second-round sanction to curb Iran’s oil exports. In terms of the oil market, despite the promise of some exporting countries to compensate for any shortages in the market and OPEC’s commitment to maintaining price stability in the oil market, full compensation for Iranian oil exports to its technical specifications is not urgent, and given the special discounts that the Iran gives to some importers, , small companies who are less concerned about cutting US financial and trading facilities will continue to buy oil shipments.
Some of Iran’s oil production is being shipped to China for storage, and part of it is also transported to tankers for informal sales. It seems that Iran could ship 300 to 650 thousand barrels of oil a day, which will not be sold every day. Selling Iranian oil on the grey market is the only way to keep some Iranian share in the oil market. Iran must sell its oil at a low price to find costumers for its oil, while another problem is how to get money from costumers? Another way is for Iranian officials is to sell Iranian oil in the name of another (third) country.
The US is forcing Turkey to stop buying oil from Iran and replace Saudi and Emeriti oil instead of Iranian oil. What are the advantages of Iranian oil for Turkey?
The main question for oil traders and political analysts is how much America wants to test these relationships by crippling the Iranian economy. According to the latest official figures available in January, Iran provided more than 12% of Turkey’s oil imports. Iraq held 24 percent of the main supply, and Russia provided 15 percent of Turkey’s imported oil. Turkey imported only diesel from the UAE in January, and now Iran is the third largest supplier of crude oil for Turkey. “Iran’s oil is not cheap, but there is a major difference in comparison to the prices of Saudi Arabia and the United Arab Emirates,” Turkish Foreign Minister Mevlut Çavuşoğlu said in Ankara.
Turkey has always defended its commercial ties with its eastern neighbors and considers it a strategic requirement. Iran’s oil could be another source of diplomatic controversy between Ankara and Washington, when relations between them are tense due to Turkey’s emphasis on purchasing a missile defense system from Russia. Turkey, after some time, will be able to find alternative for Iranian oil; although Turkey prefers to have energy relations with Iran, it seems that Turkey will decrease oil imports from Iran and they may drop to zero in the medium term.
Omid Shokri Kalehsar is a Washington-based Senior Energy Security Analyst, currently serving as a Visiting Research Scholar in the Center for Energy Science and Policy (CESP) and the Schar, School of Policy and Government at George Mason University
Interview by Payman Yazdani