Pity Mr Mario Monti, Italy's technocrat prime minister. Along with undoing the damage to the Italian economy wrought by his predecessor, Mr Silvio Berlusconi, he has another headache to contend with: the forthcoming European Union (EU) embargo on Iranian oil.
The details are still sketchy but it is likely that when they meet on Monday, EU foreign ministers will agree upon a package of sanctions, including a crude oil embargo and potentially even financial sanctions. It follows legislation passed at the end of December by the US President, Mr Barack Obama, imposing sanctions on any financial institution that deals with Iran's central bank.
With European nations receiving around a third of Iran's crude oil exports, according to the latest data from the International Energy Agency, the proposed embargo will present a major challenge to these countries, particularly Italy, Turkey, Spain and Greece, which account for around 80 per cent of that European demand.
According to current estimates, Italy currently meets around 13 per cent of its oil needs from Iran. “That explains the sensitivity, the degree of attention we are giving to this issue,” said Mr Monti at a recent press conference in London.
Also complicating the situation is the just-below $2 billion or so of Iranian debt owed to Italian energy giant Eni for upstream production work, which is expected to be paid off by 2014.
More damage to EU
Italy has agreed to the EU embargo so long as Eni receives an exemption for any oil received as part of that debt repayment, though, of course, whether in view of the sanctions Iran would be willing to continue to do so is another matter altogether. (The company declined to comment on the consequences of the embargo.) Greece too has been a reluctant party to the embargo talks, receiving around a third of its oil from Iran on favourable credit terms.
In fact, analysts are warning the embargo is likely to do far more damage to European nations than it ever would to Iran, despite the West Asian nation's reliance on such revenues (accounting for around half the government's revenues).
Despite Premier Wen Jiabao's recent visit to Saudi Arabia, China, the largest recipient of Iranian exports, has remained firmly committed to that relationship, and alone would easily absorb the lost European demand, says Dr Mamdouh Salameh, an international oil economist, and consultant for the World Bank on oil and energy. “They don't need Europe in such a tight market.” This might require Iran offering oil to India (which receives around 3,10,000 barrels a day from Iran), China and other Asian customers such as South Korea, and Japan at significant discounts on its crude, which will reduce revenues, argues Paul Stevens of London-based think-tank Chatham House in a recent briefing paper.
However, while the price remains above $100 per barrel, this is unlikely to be a serious financial problem for Iran. Politically too, far from isolating the public from the Iranian administration, it was more likely to strengthen domestic support, he argues.
Price rise
The attempt to find new buyers could have far-reaching consequences, including displacing the oil from other parts of West Asia purchased by Asia, argues Sam Ciszuk, an oil consultant at KBC Energy in the UK, who believes the embargo could result in falling prices in Asia and higher prices elsewhere. “Iranian crude not sold to Europe will be soaked up somewhere else. A country that has increased its take of Iranian crude will decrease somewhere else.”
The price rise could be very significant. Pointing to historical evidence, James Hamilton, professor of economics at the University of California, San Diego, in a recent blog post, notes that in the geopolitical events that led to production shortfalls from key producing areas from the 1973 OPEC embargo to the First Gulf War of 1990 reveal production falls of up to 7 per cent were accompanied by 25 to 75 per cent increase in oil prices.
Europe will have to grapple with the difficult task of finding alternative comparable crudes, the IEA warned in its monthly report published recently.
The loss of Iranian heavy crude, which accounts for the bulk of its European demand, will be particularly hard to compensate. Libya largely produces light crude, and its production levels, by no means, make up the required levels for export, with total production (including its own use) reaching just over 8,50,000 barrels a day level, nearly half pre-crisis levels.
Heavy crude producer, Saudi Arabia, has scope to pick up some of the slack. Last month, the kingdom announced that production had reached over 10 million barrels a day in November, though its willingness and that of other members of the Gulf Cooperation Council remains to be seen, given Iran's warnings of retaliatory action against any states that step in to fill its lost-share.
Threat to block Hormuz
The impact of the Iranian loss will be particularly hard, given that many of those European nations that do depend on Iranian oil also did on Syrian heavy crude, already subject to an embargo.
It could hit Europe's already struggling refinery industry hard. Swiss-listed Petroplus is the latest to suffer, warning that up to three of its refineries could be permanently shut down — and lead to more increases in supply from Asian refineries into Europe, argues Ciszuk.
These consequences, of course, pale into insignificance should Iran carry out its threat of blocking the Strait of Hormuz, through which some 17 million barrels of oil for global distribution pass.
Iran's UN Ambassador told the Charlie Rose show in the US that Hormuz would not be closed unless Iran was ‘threatened seriously' but the threat nevertheless remains. Analysts point out that there will be some alternatives, including the Abu Dhabi pipeline, expected to be ready by June but well short of what would be needed to prevent a full-blown crisis.
The European embargo is now widely expected to have an implementation date several months from now, with consensus building around a date in July, to give countries enough time to find alternatives.
However, that won't stop the impact falling hardest on Europe's most under-pressure nations at a time the region can least afford it.