Do oil trade sanctions work?

[Wezil]

Because they have the Iranians "over a barrel" so to speak?

Why wouldn't the Chinese push for a better deal if they can get one?

[Dauphin]

The Chinese have the following options.
1) Don't buy Iranian.
2) Buy Iranian - up to 4 million odd barrels a day at world market price
3) Buy Iranian - up to 4 million odd barrels a day at a discount somewhere between 0% and 100%

Options 1 and 2 are economically equal to China, option 3 is economically beneficial to China compared to 1 and 2, and will be chosen even when the discount is a very small percentage assuming only economic considerations. China could say they want a bigger discount, because they know Iran has no other sellers, but Iran can equally say they won't give anything but the smallest of discount because they know it's the best deal that China will ever get for its oil. I would think that Iran would have the better position (because the fungibility of oil makes price the only real form of competition). If China saw value in the sanctions they would value the sanctions as equivalent to the discount they would steadfastly demand.

[Dinner]

Why would you think there would be a meaningful discount?

Since oil is a fungible commodity I'd expect any discount (mostly due to less competition due to sanctions or because of increased transport costs) to be in the low single digits. Yeah, that will hurt Iran slightly but not really. It will likely hurt importer nations more in the form of ever so slightly increased oil costs.

[Wezil]

It's only fungible so long as someone is willing to buy it.

I agree on the importer nations aspect and I believe the US measures take that into account.

No one is mentioning the US pressure on the Iranian banking system yet? The other side to the sanctions...

[Wezil]

Their (Iranian) currency is in free fall on just the talk of these actions. Surely someone thinks the pressure is real.

[Wezil]

TEHRAN — Iran faced the prospect on Thursday of cutbacks in its oil sales to China and Japan as new measures to cut off Tehran’s crude exports appeared to be driving its economy to the wall.

The developments in Asia follow news on Wednesday that EU leaders had agreed to halt European purchases of Iranian crude.

China, Iran’s biggest trade partner, has already cut its purchases of Iranian oil by more than half this month and will extend the cuts to February, a Beijing-based trader who deals with Iranian oil said.

Japan will consider cutbacks in its Iranian oil purchases to secure a waiver from new U.S. sanctions signed into law on New Year’s Eve by President Barack Obama, a government source said.

Between them, China, the EU and Japan buy about half of Iran’s exports of 2.6 million barrels of oil per day.

International sanctions that for years had little effect are for the first time having a real impact on day-to-day life in Iran, where the rial currency has tumbled and people have rushed to convert savings into dollars.

Most oil traders still expect Iran will be able to find buyers for its crude, but it will have to offer steeper discounts that will cut the hard currency revenue it needs to import food and other basic supplies for its 74 million people.

Iran has put on a brave face. Foreign Minister Ali Akbar Salehi said on Thursday Iran would “weather the storm.”

“Iran, with divine assistance, has always been ready to counter such hostile actions and we are not concerned at all about the sanctions,” he told a news conference.

The economic hardship comes just two months before a parliamentary election, the country’s first since a disputed presidential vote in 2009 led to massive public demonstrations across the country.

The authorities put those protests down by force, but since then the Arab Spring has revealed the vulnerability of authoritarian governments in the region to public anger driven by economic hardship.

Iran’s leaders have responded to the sanctions with military saber-rattling, including a threat to blockade the Middle East’s oil by shutting the Strait of Hormuz that leads to the Gulf, and even challenging a U.S. aircraft carrier if it sails the strait.

Washington says it will sail the strait at will and will guarantee free passage through the international waterway. British Defense Secretary Philip Hammond said any attempt to block the strait “would be illegal and would be unsuccessful.”

Iranian military personnel place a national flag on a submarine during the "Velayat-90" navy exercises in the Strait of Hormuz in southern Iran on January 3, 2012, the End day of ten-day war games. Iran's military warned one of the US navy's biggest aircraft carriers to keep away from the Gulf, in an escalating showdown over Tehran's nuclear drive that could pitch into armed confrontation.

EUROPEAN EMBARGO

European diplomats said this week they had agreed in principle to impose an EU oil embargo. The bloc – particularly Italy, Spain and Greece – has collectively bought about 500,000 barrels per day of Iran’s oil, making it Iran’s second biggest customer after China.

EU leaders have yet to agree when the embargo will take effect, but are expected to announce it at a foreign ministers meeting at the end of this month.

China, the largest buyer, which imported about 550,000 bpd of Iran’s oil last year, has cut its purchases by more than half for this month and would now extend that cut to February, according to the Beijing-based trader.

China is seeking deeper discounts for continuing to do business with Iran in spite of Western sanctions.

The new U.S. measures, if implemented fully, would make it impossible for most countries’ refineries to buy Iranian crude, marking a qualitative change in the West’s approach to Tehran, which it accuses of seeking a nuclear weapon.

Iran says its nuclear program is peaceful. That standoff had led to four rounds of economic sanctions from the U.N. security council and a range of U.S. and European measures, but none of these directly hurt its ability to sell oil in the past.

Western resolve appears to have stiffened in recent months, especially after a U.N. report in November suggested Iran had taken concrete steps to develop a bomb. The storming of Britain’s embassy by an Iranian crowd galvanized support among European countries for measures with more teeth.

Still, the West needs to balance its determination to isolate Iran with concerns about the impact on a fragile world economy of measures that might hurt oil supplies.

So far, the U.S. and EU sanctions have caused a steady rise in oil prices this week. Brent crude futures were trading at about $114 a barrel on Thursday, up by about $7 a barrel since Obama signed the new sanctions into law.

A Saudi government source said Saudi Arabia – the world’s largest oil exporter and a foe of Iran – is ready to fill any supply gaps.

The new U.S. law allows Obama to offer waivers to prevent havoc in oil markets, but to receive the permits countries are expected to demonstrate that they are reducing ties with Tehran.

Washington has said it is discussing with allies how to apply the law gradually to tighten the screws on Tehran without causing an oil supply shock.

A Japanese government source said Tokyo, which buys about 250,000 bpd from Iran, would discuss with U.S. officials how to deal with the new sanctions law. Among options would be cuts in oil purchases to secure a waiver for its financial institutions.

Turkey, a U.S. ally which buys almost a third of its oil from Iran, has said it will also try to seek a waiver from the Obama administration.


NO TRADE IN THE BAZAAR

In Iran’s bazaars, prices for basic foodstuffs and other goods have been rising fast in recent months.

Much of that inflation has been caused by President Mahmoud Ahmadinejad’s policy of cutting back on government subsidies for staples that held prices down, a policy that has been praised by the International Monetary Fund.

The government has tried to ease the pain by giving cash payments to families. But the fall in the rial currency has slashed the value of those payments in dollar terms from about $45 a month to $27.

There are signs that some Iranians may blame the authorities for charting a foreign policy course that brought on sanctions.

“They give us some subsidy cash but it doesn’t compensate for anything,” said Saeed, a 33-year-old Tehran taxi driver, complaining that his imported cigarettes had doubled in price.

“When I ask people why things are becoming more expensive, they all say it’s the sanctions.”

Clothes merchant Mohammad, 34, said there was “no trade” despite the usual crowds swarming the shops and stalls in the maze of vaulted tunnels.

“We have to make the products more expensive because we have to pay more for dollars. We shopkeepers are putting pressure on people but we have no choice.”

© 2012 Thomson Reuters

http://news.nationalpost.com/2012/01/05/iran-to-take-financial-hit-as-big-oil-buyers-back-off-its-crude/

[Wezil]

The Chinese have the following options.
1) Don't buy Iranian.
2) Buy Iranian - up to 4 million odd barrels a day at world market price
3) Buy Iranian - up to 4 million odd barrels a day at a discount somewhere between 0% and 100%

Options 1 and 2 are economically equal to China, option 3 is economically beneficial to China compared to 1 and 2, and will be chosen even when the discount is a very small percentage assuming only economic considerations. China could say they want a bigger discount, because they know Iran has no other sellers, but Iran can equally say they won't give anything but the smallest of discount because they know it's the best deal that China will ever get for its oil. I would think that Iran would have the better position (because the fungibility of oil makes price the only real form of competition). If China saw value in the sanctions they would value the sanctions as equivalent to the discount they would steadfastly demand.

Why is Iran in a better position than China when China can go and buy oil elsewhere? What large purchaser is going to move in and fill China's quota of Iranian oil?

[Dauphin]

China can go elsewhere, but it would be paying more for its oil than if it bought it from Iran. If China would be willing to pay more than it has to it would only be if it gained something by doing so.

I consider your second question moot, but I would be interested in seeing how India plays its hand.

[Wezil]

I consider your second question moot, but I would be interested in seeing how India plays its hand.

It's not moot when you folks are tossing around "fungible" like a holy mantra.

[Wezil]

Iran’s parliament cracked down on unofficial money traders Sunday after new U.S. sanctions helped trigger a currency crash when Iranians rushed to buy dollars.

The rial lost about 20 per cent of its value against the dollar before the central bank intervened last week by injecting hard currency into the market.

At a special parliamentary debate on the currency crisis, lawmakers passed a measure imposing legal penalties on touts who sell foreign currencies outside official exchange offices and banks, where rates can be subjected to government controls.

The measure may scare away touts, a common sight in parts of Tehran where they wave wads of currency at passing motorists.

But it will have no immediate impact on the price most Iranians have to pay for dollars which, even at licensed exchange offices, sell at a 40-per-cent premium over the central bank’s “reference rate.”

Economists say the currency slide is because of fears about inflation – 20 per cent and rising – eroding the rial’s buying power, and the effect of Western sanctions making it harder for Iranians to get hold of foreign currencies.

Sanctions approved by U.S. President Barack Obama on Dec. 31 added to demand for dollars, pushing the rial to an all-time low last week. The new measures would cut off any bank around the world from the U.S. banking system if they do business with Iran’s central bank.

The West has imposed increasingly tight economic sanctions on Tehran over its nuclear program.

Tehran has denied that the currency problems are related to sanctions, which the government says are ineffective and illegal.

Just weeks ahead of March 2 parliamentary elections, several lawmakers used the debate to knock President Mahmoud Ahmadinejad.

“The sharp fluctuation in the foreign exchange market prices stems from the central bank and the government’s weak management since, unfortunately, the government has relinquished the foreign exchange market,” said Gholam-Reza Mesbahi-Moghaddam, head of Parliament’s special economic reform committee.

He backed the government’s assertion that the major oil exporter still has plenty of foreign currency reserves, despite new sanctions aimed at curbing Iran’s ability to sell oil, and said the problems were a simple question of bad governance.

“We have to put the management of the central bank in the hands of a competent man,” he said, a swipe at Governor Mahmoud Bahmani, who was criticized for failing to attend the session.

Mr. Ahmadinejad is set for further criticism in parliament, a conservative-dominated body, which has been increasingly hostile to him since a rift appeared between the president and Supreme Leader Ayatollah Ali Khamenei in April.

http://www.theglobeandmail.com/report-on-business/international-news/currency-slump-leads-iran-to-ban-unofficial-money-trades/article2295227/

Not bad for something that won't work.

[Dinner]

I honestly don't know why Iran can't feed itself. The country is full of very high mountains so there is probably plenty of snow melt if they could just capture it in reservoirs and move it around with aquaducts. With all that oil revenue they should be able to afford it if they properly manage things and the result would be lots more jobs (but low paying ones) and they wouldn't have to worry about importing as much food. Hell, with all the natural gas they just flair off why not build desal plants since it's all going to waste anyway?

[PLATO]

Interesting that the West is finally starting to pressure Iranian oil exports just a very few months after the Siberian China Oil pipeline opens....

Oil is fungible, but that is not the whole story. Russia has committed to increasing production to 11bn barrels per day by the end of this year. The Saudis would no doubt increase production if the result was a diminished Iran. I expect that as alternatives are put in place that the Chinese will slowly get on board. For sanctions to work, it will take time and ever increasing pressure. It will also take Iran not going off and doing something half-cocked.

[Wezil]

A separate question of course is whether the sanctions, if they do as designed (i.e. cause economic hardship to the regime), will "work" in backing the regime away from the nuclear program.

On this I am far more skeptical. I think we can cause them pain but I don't see them giving in.

[rah]

Yeah, I believe that they will cause hardship but will just galvanize their resolve to further their nuclear program. As long as the hardship is on the common people and those not in charge, they can just continue to paint us as the evil devils that want them to suffer and divert the attention away from themselves.

[Wezil]

There is the hope that enough unrest can be stirred before the upcoming elections in Iran to cause the regime to fall. They faced pretty intense pressure during the last round of elections.

Fingers crossed.