Japan is the first to call Iran an unstable energy supplier

While Iran was threatening to cut oil supplies if UN sanctions were imposed on it, Japan took the lead in terming Iran an unstable crude supplier and cutting imports. Jyotsna Ravishankar finds out how the world oil markets reacted to this sudden twist in the Iranian saga.

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By  Jyotsna Ravishankar Published  April 3, 2006

News Analysis Japan, Iran’s biggest oil customer, has become the first country to reduce its imports of Iranian oil because of Tehran’s nuclear dispute with the West. Nippon Oil, Japan’s largest refiner, will cut its purchases of Iranian crude oil by 15% this year, Fumiaki Watari, Nippon’s chairman, said last month. The 22,000 barrels per day (bpd) cut is only half a per cent of Japan’s total imports. However, the ramifications of this decision could be huge, if other Japanese customers decided to follow suit and turn their backs on the Middle East producer. Nippon Oil’s move came as negotiations have intensified in the UN Security Council over the drafting of a resolution that denounces Tehran’s uranium enrichment activities, which many countries suspect are a cover for making nuclear weapons. Although another major Japanese oil company, Arabian Oil Company, said it has no plans at the moment to cut imports, the company said it is taking precautions. “We are considering other ways to ensure a stable supply, such as increasing imports from other countries, in the event of an emergency,” Masatoshi Kasuya, a spokesman for AOC Holdings, Inc, Arabian Oil Company’s holding company told Japan Times. This sudden turn of events has shocked the world markets, as many analysts across the globe were expecting Iran to use oil as a weapon and threaten large consuming nations into agreeing to their nuclear plans. Last month even saw the Iranian oil minister, Kazem Vaziri Hamaneh, say that Iran would definitely retaliate to any UN sanctions with oil. “Iran will review its oil contracts with other countries if necessary,” said Vaziri Hamaneh, adding that the decision will be made by the country’s officials. With this news, analysts began predicting oil prices will reach upwards of US $90, if Iran were to use oil as a weapon. “The resumption of nuclear research by Iran is currently the market’s largest preoccupation,” said BNP Paribas oil analyst Eoin O’Callaghan. He has pushed up his forecast for average oil prices this year to $65 a barrel because of geopolitical risk. He pointed out that the oil price rose more than 60% in the run-up to the Iraq war; a similar increase now would take prices to $94. However, Japan has taken the lead and put Iran possibly on the defensive in the entire issue of holding oil hostage. In a mere week’s time, analysts have gone from speculating if oil would reach $100 with Iran’s threats to cut supply, to will the Opec producer have a market to sell its oil. Iran is the world’s fourth-largest oil producer. Everyday, it exports more than two million barrels of crude — twice as much as Iraq. Any move by Iran to cut off or curtail its oil exports should logically translate into higher oil prices worldwide. But, if Iran has no market to sell its oil to, what happens to prices? Iran primarily exports oil to Japan, China, South Korea, Taiwan and Europe. In Japan, other small refiners have already said they were under corporate pressure to scale back imports following Iran’s rating as an unstable producer. China so far has not issued any statement about Iran, and the Chinese have historically been allies of the Iranians. Also countries like India and China may not have many choices when it comes to securing crude supplies. “Overall, Asia’s choices are limited; they have to face the consequences if there is an interruption,” said Kang Wu of the East-West centre, a geopolitical think-tank, to Reuters. “It’s very hard for Asia to find any other source for its oil.” However, one aspect that could be worrying for the Iranians themselves is their lethargy in making any overseas refinery investment. Countries like the UAE, Qatar and Saudi Arabia have identified refineries across the world, particularly in Asia, where joint investments have been made. This secures their steady supply of crude, to at least those markets in times of a crisis. The only investment, Iran has made so far is a 16% investment in an Indian refinery. Further, Iran’s own nine refineries are in varying stages of degeneration, owing to a lack of investment in the country’s oil infrastructure. If the United States succeeds in passing the sanctions bill in April, where foreign entities with annual investment of $40 million or more in Iran’s energy business will face US sanctions, such as restrictions on US Export-Import Bank credits, export licensing, and US government contracting for goods and services, then the country may face a real crisis in its oil industry. Even if Nippon halting its imports is a bit of a red herring, and if the other Asian consumers cannot afford to be choosy, customers are going to tread on Iranian oil a bit cautiously and may even drive prices up themselves. Though analysts like AF Alhajji, of the Gulf Research Centre in Dubai, do not wish to make much out of the Japanese customer rolling back imports, he sees a hike in oil prices as the only outcome of this impending crisis. “Any actions by the UN or the US and its allies against Iran will increase oil prices by a few dollars on the fear that such actions may reduce or halt Iranian oil exports. Prices will go even higher, if Iran actually retaliates and reduces its oil exports,” he said. AlHajji also believes that Iran is too clever to reduce its exports. Instead, he says, it may choose to cripple Iraqi exports using Iranian operatives in the Basra port. There are a few more analysts who are willing to bet on Iran’s own cleverness in tackling any sanction by the United States. Iran’s investment in Indonesia is seen as a right step in this direction, where the country is pulling in closer moderate Islamic states to strengthen its own position. But, only in the next few months will we be able to know who is the brighter of the two, United States or Iran, and if their strategies have any effect on the oil price itself.

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