Diplomats inch toward further Iran sanctions

New measures against Tehran could include EU oil embargo

Iranian President Mahmoud Ahmadinejad: if embargo imposed he may close the Stair of Hormuz. GETTY IMAGES
Iranian President Mahmoud Ahmadinejad: if embargo imposed he may close the Stair of Hormuz. GETTY IMAGES

Diplomats from the US and EU met in Rome yesterday to agree further restrictions on Iran’s ability to act abroad, which may include EU embargoes on its oil industry and central bank.

"The participants repeated the need for Iran to conform to resolutions of the United Nations and the IAEA (the U.N. International Atomic Energy Agency), and asked the country to satisfy demands by the international community for timely and immediate clarifications on its nuclear programme," a Italian diplomatic source told Reuters.

Iran has invited the IEAE to return to the country, a move which western nations see as a stalling tactic unless Tehran gives specific undertaking to permit full inspections. Previous visits have frustrated IAEA officials hoping to obtain unrestricted access to Iran’s nuclear program.

The international community’s measures against Iran are in response to what they say is strong evidence of Tehran’s ongoing nuclear weapons program, which Tehran says is for civilian power generation purposes only.

The impact of an oil embargo against Iran – both on its domestic production and international prices – is disputed. Many analysts believe Iran will simply sell to Asian refiners instead of the EU, gifting China cheaper feedstock and giving crude from other countries – particularly Russian Urals and Saudi crudes – a price hike.

Tehran has strongly suggested it will blockade the choke point of the Stait of Hormuz if an embargo is imposed, carrying out military exercises preparing for a closure earlier this month. Closing the Strait could have a major impact on oil prices and supply, as 15.5 million barrels a day, a third of the world's sea-borne oil tanker traffic, passes through the channel.

Iran is also adept at dealing with sanctions, having done so for many years, offering generous credit terms to buyers such as India and Sri Lanka and relaying oil payments through third parties.

Diplomats in France and Britain believe the importance of Europe to Iran’s oil industry – which imports a fifth of all Iranian production – can make an embargo effective as Iran, which is fiscally-constrained by its high government budget, will not be able to sustain cut production or selling such a large volume of its oil at below market rates. Asian customers may be unwilling to frustrate existing import commitments from other key suppliers.

EU refiners say they can cope with the change in crudes that would come with a shift from Iranian to Saudi crude. Antonio Brufau, Chairman of Spanish refiner Repsol, told reporters in Moscow that “it is not very difficult to move from Iran to Saudi Arabia to even Russia. It depends on the quality of the crude and the needs of our system.”

The addition of a key Asian customer such as Japan could make sanctions effective. The question would then whether advanced economies, many of whom teeter on the brink of renewed recession, can afford a serious disruption in oil markets.

 

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