Iran has cut its oil shipments to Britain and France and is threatening to cut off all sales to the E.U. in response to sanctions.
What could a reduction in Iranian oil mean for the world economy and are there other countries that could fill the void?
Flux in oil sales
The United States and its allies believe that Iran is trying to build a nuclear weapon, a charge that Tehran denies. The EU recently announced a ban on Iranian oil imports beginning July 1 and froze the assets of Iran’s central bank. Iran responded by announcing it would no longer sell oil to Britain and France. Britain imports less than one percent of its petroleum products from Iran and France less than four percent.
Simon Wardell is an analyst from IHS Global. He told the Reuters news agency Iran’s move could raise world oil prices.
“With that Iranian crude export oil out of the market you will have a reduction in overall global capacity and we are still seeing growth in oil demand,” he said.
“So it does tighten the market in a very real sense at least for a period of time,” Wardell added.
Saudi Arabia has said it could easily replace Iran’s oil, but despite Riyadh’s reassurances, crude rose to its highest price in nine months after Iran’s announcement. Higher crude prices – which would lead to higher gasoline and diesel prices – could make it harder for Europe’s struggling economy to recover.
Still a player
The E.U. imports nearly one-fifth of Iran’s total crude oil exports. Among European Union countries, Italy and Spain import more than one tenth of their total crude oil from Iran. France, Germany, Britain, and the Netherlands combined import less than 10 percent of their crude from Iran.
According to the U.S. Energy Information Administration (EIA), Iran has the world’s fourth largest oil reserves, an estimated 137 billion barrels. That is almost 10% of the world’s total proven oil reserves.
Iran’s oil production has varied widely over the years – falling from a high of nearly 5.5 million barrels per day in 1976-77 to an all-time low of less than 2,000 barrels per day during the Islamic revolution. Iranian output also fluctuated during the eight-year war with Iraq. By 2010, Iran exported approximately 2.2 million barrels per day of crude. The EIA reports that Iranian net revenues from oil sales totaled $73 billion in 2010.
China is Iran’s largest customer (22 percent of Iran’s exports) followed by Japan (14%), India (13%), and South Korea (10%). But China, India, South Korea and Japan also do billions of dollars in business with the United States. As sanctions tighten, Asian countries will have to reach agreement on how much to cut Iranian oil imports in order to avoid U.S. sanctions.
But will Iran’s reductions agreed to have the desired effect or could they backfire?
John Felmy is the Chief Economist with the American Petroleum Institute. He says that experience shows that if Iran cannot sell its oil, energy costs could rise.
“We know that significant declines in supply can have a disproportionate impact on the world market,” he said. “We experienced that with Libya last year: we lost a couple percent of world supplies and you saw a disproportionate – almost 20 percent – impact on the world market. So the question is going to be what happens with the oil, does it go anywhere? You know the OPEC countries learned years ago when they put an embargo on us that it just caused a swirl of oil around the globe and it didn’t have much of an impact. You did have a very real impact when you lost 4 million barrels of Iranian production in the revolution,” Felmy said.
Iran has also threatened to close the Strait of Hormuz, blocking the tankers that carry about one-fifth of tow world’s oil. Iran has conducted military drills in the strait, including having a submarine trail a U.S. aircraft carrier as it passed through the strait.
And Iran continues to develop its nuclear program despite international sanctions. In mid-February, Iranian President Mahmoud Ahmadinejad announced that a new set of “modern” centrifuges had been installed top enrich uranium at the Natanz nuclear site. Iran says its nuclear intentions are peaceful, but Tehran has also claimed to enrich uranium to a level beyond what’s needed for nuclear power. .
An Iranian flotilla – a supply ship and a destroyer – also passed through the Suez Canal to the port of Tartus, Syria. Tartus is also where Russia – another major oil producing nation and like Iran an ally of Syria – has its only naval base on the Mediterranean.
Iran also blames Israel for the assassination of its nuclear scientists, most recently Mostafa Ahmadi Roshan, a supervisor at a department at the Natanz uranium enrichment facility.
Also, a team of International Atomic Energy Agency inspectors was not allowed to inspect the Parchin military site, which is believed to be where Iran is testing explosives that could set off a nuclear weapon. White House spokesman Jay Carney called the move “another demonstration of Iran’s refusal to abide by its international obligations.”
A recent spate of bombings in India and Georgia targeting Israeli diplomats has also ratcheted up tensions. Tehran has denied any connection to the attacks and to three Iranians arrested in Bangkok who were allegedly planning to hit Israeli targets.
Iran’s saber rattling has caused concern that Israel might attack Tehran’s nuclear facilities. U.S. officials have been visiting Israel to dissuade the Netanyahu government from taking direct military action.
U.S. National Security Adviser Tom Donilon met with the Israeli leadership ahead of Prime Minister Netanyahu’s visit to Washington in March. U.S. Joint Chiefs Chairman Martin Dempsey said in a CNN interview that it would be “premature” for Israel to take any action against Iran’s nuclear program.
The U.S. moves come as President Obama is set to meet with Israeli Prime Minister Benjamin Netanyahu in early march before Netanyahu speaks to the top Israeli lobby group in Washington, AIPAC.
President Obama has said the United States “cannot be held hostage by the ups and downs of the world oil market.” In a recent speech, the President said that higher gas prices would hurt the U.S. economy.
“When gas prices go up it hurts everybody,” Obama said. “Everybody who owns a car, everybody who owns a business [gets hurt]. It means you have to stretch a dollar even farther. High gas prices are like a tax straight out of your paycheck,” the President said.
Even without trouble in the Middle East, gasoline prices are predicted to rise above $1.05 per liter ($4 a gallon) in the next few months, a level that U.S. consumers have shown they will not readily tolerate. Any threat – real or not – to the world crude supply could cause gasoline prices to spiral to a level the American public has not seen. Higher gas prices would also harm Obama’s re-election campaign at a time when his job approval numbers have only recently improved.
The United States is the world’s top oil consumer, drinking nearly 20 million barrels a day. Even with rapid growth in production – including oil from shale deposits – the United States cannot produce enough oil to meet domestic demand.
Higher crude oil prices – and subsequent higher fuel prices – would raise the price of food and consumer goods, which could harm the U.S. economic recovery.
David Byrd is a journalist, writer, video editor and photographer. He is also the host of VOA's American Cafe, a weekly show covering life and culture in the United States.