How will US sanctions on Iran affect the industry?
Amid new sanctions on Iran, fears have arisen over the worlds global oil supplies
Back in May, the U.S. left the Nuclear Iran Deal with the intention of resuming sanctions on Iran. The first wave hit the Middle Eastern nation this week, with the U.S reinstating sanctions on Iran damaging many vital sectors such as gold, precious metals and its automotive industry.
However, this is just the tip of the iceberg. Additional sanctions are due to be imposed in early November, aiming to completely halt Iranian oil exports. The second wave of sanctions will target sectors and companies crucial to exporting oil, such as shipbuilders, port operators, energy companies and financial institutions. The U.S. has also said that companies exporting oil from Iran after the November deadline will also receive sanctions.
Oil prices rose after U.S. sanctions on Iran went into effect, raising concerns that a lack of Iranian oil will lead to supply shortages. This occurred despite the fact that this round of sanctions did not include anything related to Iran’s oil exports.
However, oil prices fell midweek, with the United States Oil and United States Brent Oil falling 3.2% and 2.9 %. Brent crude settled at $72.28 a barrel.
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As a result of the imposed sanction’s and growing fears raised over Iran’s ability to continue exporting oil, the Iranian economy has substantially declined and is reportedly on the verge of breakdown.
Will there be an oil shortage?
U.S. officials have stated that they intend to get Iranian oil exports down to “zero.” It is unlikely that the U.S. will be able to completely shut down Iranian oil exports, but it will severely diminish it via co-operation with most EU companies. However, there have been growing fears about a potential oil shock reminiscent of the events in 1973 and 2008.
If the November sanctions go ahead as planned, up to one million barrels a day of Iranian oil will be blocked from global oil supplies. The Middle Eastern nation reportedly exported an average of 2.1 million barrels a day throughout 2017.
According to the International Energy Agency (IEA) maintaining the world’s oil supply will prove to be a challenge. A spokesperson for the organisation said, “As oil sanctions against Iran take effect, perhaps in combination with production problems elsewhere, maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion.”
If the gap isn’t filled by another source, the world’s spare oil capacity will be practically zero, leaving global markets defenceless against a potential oil shock.
However, this is just one outcome. Other nations may see this as an opportunity to fill the gap by increasing their own oil exports. OPEC nations and Saudi Arabia, in particular, have already expressed a desire to maintain the markets through increased exports.
How has the world reacted?
The reinstated sanctions have been criticised by most world powers, including many countries in the EU China, India, and Russia. However, it is expected that companies from most nations – particularly the EU – will stop importing oil from Iran.
The war of words between the U.S. and Iran have been heating up. Iran has hinted that it will retaliate. If the Iranian government does take to action it may decide to meddle with middle eastern shipping lanes or close the Strait of Hormuz causing further damage to global oil supplies.
China, Russia and India have stated they will continue to export oil from India despite U.S. sanctions.
China – as one of the worlds top buyers of Iranian oil – is already embroiled in a trade war with the U.S., giving China more reason to maintain a defiant posture.
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The U.S. government has stated that India has a significant role to play in reducing Iranian oil exports and that India’s cooperation is vital to the sanctions effectiveness. However, India - one of the top 5 oil consumers in the world - imported nearly 40 per cent of its oil from Iran in 2017. Iranian oil is vital for the Indian economy and the geographical proximity between the two nations make an oil partnership an obvious choice.
However, some countries are already following suit. Many companies in the European Union and South Korea have been cutting back on Iranian oil imports since July.
Japan, on the other hand, has expressed a willingness to continue importing oil from Iran. As a result, the Japanese government has requested an exemption from the U.S. government. Japanese imports from Iran accounted for 5.3 per cent of Japan’s total crude oil imports in the first half of 2018.
U.S. officials have stated that they are not aiming to give out exemptions, but they are willing to hear out proposals on a case by case process.
There are signs of a price war emerging amongst major oil producing nations in the Middle East as a result of U.S. sanctions. Saudi Arabia – Iran’s main rival in the Middle East will likely push for themselves and other OPEC members to make up global oil losses, which will be strongly condemned by Iran.