Iran squeezed on petrol imports

The pullout of oil companies from Iran will not prevent it from tapping new suppliers from China and the UAE.

Iran's imported petrol supply will be squeezed by a recent withdrawal of oil trading companies from the market, analysts say, but the country will still be able to tap a number of suppliers, including some in China and the UAE. The oil major Royal Dutch Shell and Vitol, a Swiss oil trading company, confirmed this week they had stopped taking new orders from Iran from January 1.

Both have served as suppliers of petrol to Iran in recent years, Neither company gave an official reason, but the moves follow similar actions by Reliance of India and the UK-based BP, and were almost certainly linked to warnings by the US government that it may levy sanctions on all oil firms that supply petrol to Iran, analysts said. Any such sanctions would be designed to push Tehran to open up its nuclear programme to external monitoring.

"The decision by European companies and Reliance to stop supplying Iran with [petrol] will force Iran into secondary and less efficient markets in order to obtain petroleum, which will increase Iran's transaction costs," said Cliff Kupchan, an Iran expert at the Eurasia Group, a political risk consulting firm based in New York. Iran is rich in crude oil reserves, but a combination of generous subsidies for petrol that pushed up consumption and under-investment in oil refineries has forced it to import over a third of its supply of refined motor fuel in recent years.

Supporters of tough action against Iran cheered reports this week that Shell and Vitol, along with Trafigura, another Swiss trading company, had withdrawn from the Iranian market. "The decision - demonstrates that the mere threat of [petrol] sanctions can change the calculus of Iran's major partners," said Mark Dubowitz, the executive director of the Foundation for Defence of Democracies, a Washington lobby group that has advocated tough action against Iran. "These sanctions would rock an already shaky system," he said.

Official estimates vary, but Mr Dubowitz reckoned that European firms supplied two-thirds of Iran's petrol last year. Estimates for the total volume of imported petrol last year ranged from 120,000 barrels per day (bpd) to 150,000 bpd, with the US Energy Information Agency naming companies from China, Malaysia, Kuwait, Russia, France, the Netherlands and Switzerland as the top suppliers. Iran's many opponents in Washington advanced the unilateral sanctions plan early last year as a "stick" that the US could use to persuade Iran to co-operate with international demands to allow outside inspectors access to its nuclear programme.

Proponents of the plan said oil firms would not risk losing access to the US market to supply Iran, and the resulting petrol shortages and high prices would sap popular support for the government among Iranians. Critics said the plan would have the opposite effect, and push Iranians to rally around the government. The two houses of US Congress have each approved measures giving the US President Barack Obama the authority to close the US market to oil firms and insurance companies that help Iran obtain petrol. But the two houses have yet to reconcile their individual proposals, and the White House has not said it would approve the bill or put those powers into force.

The US's unilateral action will not be able to fully choke off Iran's supplies, said Mr Kupchan, who noted that the country would still be able to buy petrol through spot markets in the Gulf and state oil companies in Asia that do not operate in the US and have no economic incentive to bend to US pressure. "The bottom line is unless this is enacted on a UN basis, making petroleum exports illegal for all member states, the bite on Iran will be limited," he said. "Iran will know how to find suppliers willing to sell, Iran will know how to set up front companies that those suppliers may want for protection, Iran will know how to make the origin of the petroleum more opaque."

The open spot markets in the UAE have, in particular, served as a major source of Iran's imports, he noted. Iran is able to buy petrol shipments that come in from around the world without a defined destination. Iran has not been blind to the vulnerability of its fuel imports. Iranian officials said last year that refinery upgrades were being expedited to allow it to produce enough petrol to cover demand before 2012, and the parliament last Monday approved a move to slow consumption growth by reducing fuel subsidies within five years.

* with Dow Jones [e-mail]