Chinese oil demand fueling Iranian defiance

Despite tough talk from Washington, China needs Iran's oil too much to support sanctions that might actually bite.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Steve Hargreaves, CNNMoney.com staff writer

chart_china_oil4.03.gif
chart_iran_crude.03.gif
G-20 summit: 6 countries in recovery
The G-20's six largest economies took a big hit during the global recession in the past year and a half. Challenges remain but most appear on the path to recovery.

NEW YORK (CNNMoney.com) -- Don't look for Iran to throw up the white flag anytime soon.

The Obama administration is scrambling to tighten trade sanctions against Iran after the disclosure last week that Tehran was hiding a heavily fortified facility that many believe is designed to make material for nuclear weapons.

But the kind of sanctions that would really hit Iran's economy - sanctions against its energy industry - are thought to be off the table because China and other nations are too reliant on Iran's oil.

"They look to Iran as a major source of future oil supplies," said James Placke, a senior associate at Cambridge Energy Research Associates who specializes in the Middle East. "They'd have to go through a substantial policy reversal, and I'd be surprised if they did that."

The United States and its allies can tighten sanctions all they want - The United States already has extensive sanctions against Tehran. But without the Chinese on board sanctions don't have the official weight of the United Nations Security Council, and are thus taken less seriously by the world community.

Iran is vulnerable to sanctions on both oil it exports and the gasoline it imports.

The oil side is where the country generates serious money, and an embargo could come in the form of restricting oil sales or imports of equipment designed to increase production from the country's aging oil fields.

Iran is the world's fourth-largest crude exporter and holds the planet's third-largest supply of proven oil reserves, according to the Energy Information Administration. The country exported nearly two and half million barrels of oil a day in 2008.

Oil exports account for nearly half the government's revenues and most of those exports go to Asian countries, with China taking a big chunk.

The Chinese rely on Iran for 15% of their oil imports. Moreover, China has been investing heavily in the country as it looks to lock up resources for its growing economy. Meanwhile, interest from Japanese, European and Canadian firms wanes in the face of U.S pressure. State-run Chinese oil firms are now thought to have deals worth over $100 billion with Iran.

And even though the Russians have signaled a recent willingness to step up sanctions - perhaps due to Obama's plans to scrap a missile defense system in Central Europe - it's thought that they're still not willing to go after Iran's energy sector.

"Russia and China aren't yet at the point where they'll be willing to cut off oil and gas investment in Iran," said Michael Levi, a senior fellow for energy and the environment at Council on Foreign Relations.

Squeezing Iran's gasoline imports is another tack sometimes called for by sanction hawks.

Despite being a huge oil producer, Iran lacks the refining capacity to turn all that crude into gasoline. As a result, it imports up to half of the gasoline it consumes.

Much of that gasoline comes from India. But barring a Security Council resolution, India isn't likely to stop these shipments for a few reasons: It's big business; India imports a lot of crude from Iran; India doesn't' want Iran getting any closer to China, India's long-time rival in the region; and India has its eye on getting natural gas imports from a huge field Iran controls under the Persian Gulf.

"I imagine India would find a rational reason in their foreign policy for not doing that," said Placke, who was a deputy assistant secretary of state for near eastern affairs before joining Cambridge.

All of this bodes ill for those in Washington trying to cajole Iran into halting its suspected nuclear weapons program.

So if sanctions don't work, then what?

The military option may have severe repercussions. Facing heavily guarded facilities, a bombing campaign may only succeed in merely delaying any weapons program Iran might have, and bolster the current hardline administration in the process. It may also invite reprisals from Iran's proxies in the West Bank, Gaza Strip, or Iraq.

From an energy perspective, Iran may retaliate by attempting to choke off Gulf oil exports through the Strait of Hormuz or, more likely, strike Saudi Arabia's main oil loading facility at Ras Tanura.

But a nuclear armed Iran could also have severe repercussions. While many analysts say the talk of annihilating Israel may well be political bluster, touching off a nuclear arms race in the Middle East is all but certain. Turkey, Saudi Arabia, and maybe Egypt would all scramble to develop their own bomb.

"Some talk casually about striking Iran and some talk casually about Iran with a bomb, but they're both horrible scenarios," said Steve Clemons, director of the American Strategy Program at the New America Foundation. "We're not investing enough in creating non-nightmare scenarios." To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More
My part-time job is a dead end, but it's all I can find CNNMoney profiles 4 of America's 7 million part-time workers unable to find full-time jobs. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.