Strict U.S. and European Union (EU) sanctions targeting Iran's oil exports haven't deterred the country from continuing to work on its nuclear program, but pressure is building in the U.S. Congress to tighten the screw even more, according to two Washington-based consultants who spoke Sunday on Platts Energy Week, an
all-energy news and talk show program.
"There's a sense that we're running out of time to stop Iran's quest for nuclear weapons," said Robert McNally, president of Rapidan Group and former energy adviser to President George W. Bush.
“We're almost 10 years into international efforts to stop Iran's quest for a nuclear weapons capability, and I think there's a sense that we are running out of time," he added.
"That clearly explains the extraordinary votes last week in Congress, when you have the Senate of the United States, which can't agree on much these days, vote 99-0 to back Israel if it attacks Iran unilaterally, that's remarkable at any time, certainly now."
"And in the House [of Representatives], the foreign relations committee passed a bill with 351 co-sponsors that calls for removing a million barrels a day of Iran's oil from the market. These two extraordinary steps show that there's a sense we're running out of time to stop Iran's quest for nuclear weapons."
But Sara Vakhshouri, president of SVB International and former adviser to the director of the National Iranian Oil Company International, cautions that going too far on sanctions could hurt future negotiations and, if those talks break down, it could affect energy security in the Persian Gulf region.
"If we completely cut [out] the Iranian oil market, Iran will not sit quiet[ly]," she said on the program. "Having even a little bit of flow of oil" she said, is the best way to keep Teheran sated enough to not increase tensions further in the Persian Gulf.
Iran, of course, is no stranger to sanctions, Vakhshouri said, adding that Iran has been under sanctions since its revolution more than 30 years ago.
But it was particularly painful for the country, which is highly dependent on its revenue from oil, when the EU stopped buying Iranian oil last year.
She noted that, for the first time, Iranian oil was cut by certain degrees from the market, "so both psychologically and practically, it was tough for Iran and it was trying to find certain ways to circumvent it."
More Sanctions Not Without Risk of Price Boost
Congress has been selling the idea of more sanctions against Iran lately by saying the oil market is loosening and Iranian oil could be lost without much upward pressure on prices, but both McNally and Vakhshouri agreed that positioning it that way would be a mistake.
Sanctions are "the right thing to do in my view, because we're running out of time and the consequence of failure [of sanctions] are even worse for the oil markets and global peace, but it would be wrong to say the market is loosening up and we can do this without risk or higher energy prices," McNally said.
Both noted that the most recent estimates of spare oil production capacity – the market's "safety cushion," generally figured using the Organization of the Petroleum Export Countries (OPEC) as a gauge – peg it at about 2.7 million barrels per day (b/d). Iran alone exports between 1 million and 1.5 million b/d, so cutting Iranian oil would eliminate roughly half of that cushion.
The U.S. Energy Information Administration and the International Energy Agency estimate that spare capacity could reach 3.5 million b/d by the end of 2013, "but that's where we were when we lost Libya [oil]," and when we did that, "prices went up $20-$25," McNally said.
"So the market is tight, it may loosen in the future, it may not, but whether the market is loose or tight, the cost of letting Iran get nuclear weapons outweigh the potential cost of trying to stop them, including through sanctions, because sanctions might work," he said.
But the physical supply of oil may not be the driving factor, according to Vakhshouri. "Spare capacity – particularly OPEC spare capacity – historically is low," she said. "Whenever the spare capacity is low in the market, it increases the panic in the market, the panic in the market increases the prices in the oil paper market and it's going to increase the prices," she added.
McNally suggest that instead of selling the sanctions as "cost-free," the U.S. and other countries should prepare to use their strategic petroleum reserves if necessary.
But Vakhshouri cautioned that it may not be enough. In the case of the U.S., she said, the Strategic Petroleum Reserve (SPR) stood at 696 million b/d as of May 24, which, with current consumption trends, would last no more just over a month.
"I don't think it should be a tool and I don't think there's any appetite to use it as a tool," she said.
Other Program Segments
Also on Sunday’s program was James Aman, senior meteorologist with Maryland-based Earth Networks, who discussed the outlook for the 2013 hurricane season. Aman also addressed the prospects for heat, droughts and other potential challenges facing to the energy industry this summer.
In addition, Michael Levi, the director of energy security and climate change with the Council on Foreign Relations, joined the program to discuss his new book, “The Power Surge: Energy, Opportunity, and the Battle for America’s Future.”
Source: Platts