The Implications of Iran Sanctions for Asian and World Energy Markets

July 5, 2012

NBR Project Manager Lynann Butkiewicz comments on the U.S.-led effort to impose sanctions on Iranian oil exports.

The United States is leading the effort to impose sanctions on Iranian crude-oil exports out of fear that Iran will develop a nuclear weapon. However, Tehran vehemently claims its nuclear program is for civilian use. The United States has asked other countries—most importantly, major Asian importers of oil, such as China, India, Japan, and South Korea—to cut back oil imports from Iran. Most have abided by the sanctions and are now waived from additional U.S-led financial sanctions, except China that was granted a six-month exemption.

These sanctions raise key questions regarding Iran’s economy and have far-reaching implications for Asian and Middle Eastern countries and the world oil market.

Iran, like most oil-rich countries, uses subsidies to keep fuel prices low. However, in 2010 Iran cut these subsidies significantly, which led to skyrocketing gas and food prices. Since then, the price of fuel has risen threefold, while the cost of gas has increased by 500%. Some claim these cuts were a government scheme to rein in the Iranian middle class and prevent protests like those that occurred after the 2009 elections. However, the more likely reason for subsidy cuts is that the government could no longer afford them. It is becoming more expensive to import fuel due to U.S.-led sanctions, and Tehran is trying to reduce the costs and consumption that affect these import sanctions. The newest sanctions on crude-oil exports will affect about 50% of Iran’s total government revenue, which will further pinch Iran’s economy and squeeze the regime even more.

The second key challenge is how oil-importing countries in Asia—the destination for 62% of Iranian oil—are responding to the sanctions. I participated in NBR’s Energy Security Workshop “Oil and Gas for Asia: Geopolitical Implications of Asia’s Rising Demand” in Washington, D.C., where experts discussed the key obstacles that Asian nations face as a result of the sanctions on Iran and how countries are approaching this situation differently.

Participants agreed that Asian nations will look toward other oil exporters, mainly Saudi Arabia, to fill the gap created by the sanctions. However, most countries, especially Japan and South Korea, are also looking to diversify their energy imports so that they do not rely solely on Middle Eastern oil. Some may look toward North America for natural-gas exports, and Japan has plans to restart two of its nuclear reactors that were shutdown following the Fukushima disaster.

India, for its part, received an exemption from U.S. financial sanctions against Iran but faces obstacles to ensuring the transport of Iranian oil once the European Union’s ban begins on July 1, 2012. In a Q&A with NBR, Harsh V. Pant (King’s College London) argued that India, like other Asian nations, is looking to diversify its energy supply beyond Saudi Arabia.

How will the sanctions affect world oil prices? Iran’s Minister of Economic Affairs and Finance Shamseddin Hosseini claims that prices will increase substantially to over $160 per barrel once the EU ban begins. However, if Iran’s oil exports are only limited, and not reduced to zero, world oil prices probably will not experience such a significant spike because the oil market is better supplied as a result of Saudi Arabia’s and Iraq’s increases in production and the quick recovery of Libya’s crude production. Furthermore, the weak global economy is relaxing pressure on oil supplies, leading to a drop in prices.

Read more on NBR’s Energy Security Workshop “Oil and Gas for Asia: Geopolitical Implications of Asia’s Rising Demand.”

Tagged as: india, iran, japan, oil, saudia arabia, south korea, united states

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