Oil prices rose again to about US$ 100 per barrel (having dropped earlier to about $ 90), with the Western sanctions on Iranian oil exports coming into effect on the first of July. This is despite the fact that these sanctions, the toughest of their kind on Iran, had already begun in earnest with the beginning of this year, after the U.S. and the EU agreed to adopt ‘diplomatic means' rather than military ones to deter Iran from pressing ahead with its nuclear program. Prices also received a boost last week with the strike announced by oil-sector workers in Norway, blocking around 240,000 barrels of oil per day from the markets – or about 15 percent of Norway's output. Western nations imposed various sanctions on the Iranian oil sector during the past three decades. During this long period of sanctions, Iran managed to adapt and learn how to dodge them. However, the sanctions, among other factors, led to decreasing Iran's output from about 6 million barrels per day to no more than about 4 million barrels per day. Furthermore, the multifaceted sanctions set some kind of a ceiling for Iranian oil exports, which could not exceed 2.5 million barrels per day. This is not to mention Iran's failure to build projects that aim at exporting gas to neighbouring countries would be proportional to the size of Iranian gas reserves (second largest worldwide after Russia). The best example of this is the failure to build the gas export pipeline from Iran to India thru Pakistan, despite at least two decades of negotiations. In addition, the ban on the sale of technologies and technical services to Iran has made it difficult for the latter to build the required refining capacity, subsequently forcing Tehran to import gasoline. It is clear that the previous sanctions had focused on the oil sector, slowing down its growth and increasing its development costs. The present sanctions, however, as well as being tougher, are actually broader in scope and goals, as they have gone further than the oil sector, and targeted financial institutions and foreign trade. In other words, the sanctions have focused this time on the entire Iranian economy, as well as the Iranian oil sector. The ban on oil exports to Europe and Asia (the two main markets for Iranian oil) are but an attempt to dry up the country's sources of hard currency, and also to block transactions with the Iranian Central Bank and other Iranian financial institutions – naturally with a view to step up the pressure on Tehran. Of course, Tehran is not expected to stand idly by with regard to these sanctions. There are news reports that Iran has modified the names and flags flown by its tankers, with some now anchored near Indonesian shores, and small tankers used to ship oil to Chinese shores. Also, Iran seems to be offering large discounts on its oil exports, and buying dollars from the Iraqi market. All European countries have halted their imports of oil from Iran. However, the situation is different as regards the Asian countries, which are seeking instead to only reduce these imports. Iranian exports have thus begun to shrink for two main reasons: The warning issued by the U.S. giving the Asian countries 180 days to cut down crude imports from Iran (including some major importers of Iranian oil such as Japan, South Korea, India and China). The second reason, meanwhile, is the European refusal to insure tankers loaded with Iranian oil. In this regard, India an China, the largest two importers of Iranian crude, are each attempting to find other ways to insure the tankers, without relying on European insurance companies. This is done by relying on the Iranian tankers themselves, but under different names and flags; by insuring the ships with Iranian companies; or by purchasing insurance from local companies – a difficult and risky process. But all these measures remain limited in scope. It is therefore difficult for Iran to avert the repercussions of this large-scale embargo. And indeed, the value of the Iranian riyal has declined by about 50 percent since the beginning of this year, with inflation hitting record highs. The Western countries have pursued sanctions as a way to thwart a pre-emptive military strike by Israel. Negotiations with Tehran over the past months have failed to convince Iran to allow the IAEA to inspect its underground uranium enrichment facility in Fordo near Qom. The Iranians proposed to suspend the enrichment of uranium by 20 percent, and to move the enriched uranium in its possession outside of Iran, but refused to discuss the facility in Fordo, which the Iranians claimed, is not a military facility, and therefore, is not up for negotiation – meaning it is a red line. This was one of the major reasons for the failure of the talks. It should be noted that the major countries, including Russia and China, adopted a unified position in these negotiations. What will the Iranian-Western confrontation lead to? It is clear, so far, that the West is unprepared to wage a new war in the Middle East, or in this case, to topple the Iranian regime. Further, Tehran is unwilling to compromise on or abandon its nuclear program. There are several indications that Israel is waiting for the opportune moment to destroy the Iranian nuclear facilities, in the event it becomes certain that Tehran is moving forward with its nuclear program. Subsequently, the Middle East has entered a new dangerous phase, politically and even militarily speaking. Most data shows that global production is increasing, and even point to a surplus in the markets. Indeed, the outputs of Saudi Arabia, Iraq, the UAE, Kuwait, Libya and Russia have increased recently. Thus, no shortage of supplies is expected to happen despite the interruption or reduction in Iranian exports. Why, then, are price levels high? This is the result of concerns surrounding developments in the Middle East resulting from this confrontation, and also the result of mutual threats between the two sides. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
