Asia oil buyers key as West raises Iran stakes

It?s clear the US and Europe are increasing the pressure on Iran to halt its nuclear programme by going after its oil trade in Asia. What?s not clear is how this will play out. Iran sends more than 1.4 million barrels of crude a day to Asia and the planned US sanctions target the payment for shipments. It appears the US aims to make it difficult, if not impossible, for foreign banks to pay Iran for oil.

The ultimate aim would seem to be to squeeze Tehran to the point of bankruptcy, thereby forcing it to abandon its nuclear programme, which it claims is only for peaceful power generation and not to make weapons. It all sounds fine in theory, but it remains to be seen how it will work in practice, how much effort the USwill put into closing loopholes and whether any of this will actually force Iran to change its nuclear direction.

It also remains to be seen how the world can replace lost crude should Iran stop shipments if it isn?t getting paid, and whether the global economy in general, and Asian crude buyers in particular, are prepared to pay more money for oil in order to achieve a what is essentially a Western political goal.

Assuming that the financial sanctions, approved Thursday by the US Congress but not yet signed into law, do significantly disrupt Iran?s oil trade, it?s highly doubtful Tehran will pay them any heed for now.

President Mahmoud Ahmadinejad has too much invested in defying the West over the nuclear programme to give up or even retreat, and it would probably take a total collapse in his government?s revenues to spark a big enough crisis. The question is then whether a breakdown in oil?s Iran trade is feasible, likely and indeed desirable.

The key appears to be whether the US will allow exemptions for certain buyers of Iranian crude. Certainly Japan, which buys about 2,50,000 barrels a day from Iran, and South Korea, which takes about 2,40,000 bpd, are keen to be let off. If these two US allies are successful in circumventing any measures, you can bet your bottom dollar that others, such as India, which normally buys about 11% of its oil from Iran, will also seek exemptions.

The more exemptions that are granted, the more financial sanctions turn into a toothless tiger that, at best, are a nuisance for Tehran and, at worst, a signal to hardliners that they can continue to snub the West at will. The attitude of the Chinese will also be important, as they are Iran?s biggest customer, taking about 5,43,000 barrels a day, or 10% of their imports. The thinking has been that the Chinese stand to be the winners out of this brouhaha, as the Iranians will be forced to sell more and more crude to Beijing at cheaper and cheaper prices.

While China can take some more Iranian crude, it remains to be seen whether their refineries can switch to processing it, or whether the authorities see it as acceptable to boost their dependency on a supplier that is seemingly on a path to heightened conflict with much of the developed world.

Chinese banks also may find it difficult to process payments to Iran if the US measures prove effective, given the global nature of their businesses. The Chinese may find themselves pushing back against any measures by the US and Europe to sanction Iranian crude, more from a commercial and strategic point of view than out of any great support for Tehran?s policies. There is also the possibility that Iran can work around any sanctions by using the sometimes murky world of physical oil trading.

Leaving aside that there may be enough loopholes in the sanction plans to sail a VLCC through, it is also extremely risky to disrupt the physical oil market at a time of already high prices and weak economies in the developed world. The total loss of Iranian crude from the market probably could be handled, assuming other producers boosted output and global demand eased as a result of the higher prices.

But this would raise energy costs at a time the world could least afford it. The ante has been upped in the West?s high-stakes poker game with Iran.

The author is a Reuters market analyst. The views expressed are personal.