NEAR EAST REPORT AIPAC'S BIWEEKLY ON AMERICAN MIDDLE EAST POLICY

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Amid tightening sanctions, some of the world's largest shipping companies have stopped calling at Iran's ports, making it extremely difficult to ship crude from the Islamic Republic.
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The International Energy Agency (IEA) said in its latest report that Iran's oil exports have fallen by an estimated 40 percent since the start of the year.

As Sanctions Strengthen, Iran's Oil Profits Suffer

Continuing to snub the demands of the international community to curb its nuclear program, Iran is facing unprecedented pressure over its activities. International sanctions have dramatically reduced the Islamic Republic's oil exports, jeopardizing a critical source of revenue for the regime. The threat of U.S. sanctions targeting Iran's central bank has forced several countries to reduce their purchases of Iranian oil, delivering a severe blow to Tehran's energy sector. A European insurance ban, meanwhile, has made it extremely difficult to ship crude from Iran, increasing the country's economic woes and deepening its international isolation.

The latest reports show that Iranian oil exports are down by 40 percent since the start of the year. In April and May, Tehran's oil sales plummeted by more than 1 million barrels per day, causing daily losses of $90 to $100 million based on current oil prices. Should this trend continue, Tehran will lose around $40 billion by the end of 2012—about half of what it earns in a typical year. This revenue loss comes on top of other economic pressure from sanctions against Iranian banks and key industries, sending the country's economy reeling.

Iran's Largest Oil Buyers Looking Elsewhere

Last December, Congress overwhelmingly approved unprecedented sanctions targeting the Central Bank of Iran. Though the sanctions, which essentially exclude financial institutions that deal with the bank from the U.S. banking system, take full effect on June 28, they have already had a significant impact on Iran’s energy sector. Intended to prevent purchases of oil through Iran’s central bank, the legislation authorizes the Secretary of State to award exemptions to foreign banks whose governments “significantly reduce” purchases of Iranian crude. Since March, the Secretary has awarded waivers to eighteen of Iran’s largest oil buyers, demonstrating America’s broad success in curbing foreign purchases of Iranian crude. 

Eager to receive exemptions from U.S. sanctions, Iran’s most loyal customers have sharply reduced their oil purchases. Earlier this year, Turkey promised a significant cut in its imports, and its state-owned oil company has since reduced its purchases by about 20 percent. Tehran’s four leading oil buyers – Japan, China, India, and South Korea – have slashed 18 percent of their oil imports relative to last year, according to government and industry sources familiar with global energy markets. 

Significant reductions in Iran’s exports to Asia represent the greatest threat to Tehran’s energy sector.  In April, Iran offered 180 days of credit to Asian customers cutting their oil imports, revealing its growing nervousness about a drop in sales to the continent. In the first five months of 2012, China – Iran’s most reliable oil customer – slashed 25 percent of its oil purchases relative to last year. However, Chinese oil imports have recently started to rebound and the U.S. is watching the situation closely to determine if sanctions are warranted. India, Iran’s second-largest buyer, has announced it would cut Iranian oil imports by 11 percent in the coming year.

Limiting Iran's Ability to Export Oil

A European ban on Iranian oil imports that takes effect July 1 has also contributed to Tehran's energy woes, severely limiting its ability to send its oil abroad. In addition to prohibiting direct imports, the European Union has barred shipping firms from handling exports to third nations, and has banned insurers from covering any ships carrying Iranian oil.

Some of the world's largest shipping companies have already stopped exporting Iranian oil in light of the E.U. sanctions. As a result, Iran has been forced to rely on its own ships and smaller firms to carry its exports. But this is becoming more and more difficult, as political and legal pressure builds for companies to cut their ties to Iran's oil tanker operator, the National Iranian Tanker Company (NITC).

Because European insurance firms cover more than 90 percent of tankers carrying Iranian oil, the E.U. ban has further disrupted Iranian oil shipments. Fearing the ban's impact, Asian countries have frantically searched for ways to insure their vessels. Asian ship-owners have desperately sought guarantees from their governments, with Japan passing a law to insure importers of Iranian oil. Korea, however, is unable to provide coverage, forcing its refiners to halt Iranian imports from July, while India's oil minister hinted earlier this month that his country may similarly cease importing oil from Iran due to growing insurance woes.

The insurance ban has also dealt a major blow to Iran's petrochemical sector. With most shipping firms unable to obtain European insurance, Iran's petrochemical exports plunged nearly 90 percent in May. According to industry experts, reductions in Tehran's sales of petrochemicals are likely to continue after the measures are implemented.

Iranian Oil Production Sharply Declining

Declining investments in Iran have caused major reductions in its oil output, casting major doubt on Tehran’s ability to maintain production levels. In April, the International Energy Agency (IEA) reported that Iran’s oil production had fallen 50,000 barrels per day. The U.S. Energy Information Administration, meanwhile, predicted that Tehran’s output could drop ten times that amount by the end of 2012.

In May, Iran’s oil production reached its lowest point in 20 years. An energy analysis group, which reported the decline, attributed Tehran’s woes to “growing isolation due to its nuclear program.” Responding to a sharp drop in production, Iran has deployed half of its supertankers to store its unsold oil in the Persian Gulf. Industry experts – including those from the IEA – estimate that Tehran now keeps about 40 million barrels of oil on anchored ships.

Should these trends continue, Iran may soon run out of capacity to store unsold oil. A June report of the IEA warned that “Iran may need to shut in production volumes if export markets remain similarly restrained.”

Iran’s mounting problems finding buyers for its oil and shipping it out, as well as the drop in production, are bad news for a country heavily dependent on oil revenues. The loss of income, potentially creating a budget shortfall, is sure to increase the pressure on a regime struggling to deal with an already ailing economy.

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