* Waivers for China, India, South Korea expire in December
* Law requires new round of import cuts for waiver renewal
* Government seeks "consistent and gradual" reduction
* "Diminishing returns" seen from future oil cuts
By Roberta Rampton and Timothy Gardner
WASHINGTON, Oct 22 Just weeks after the
election, U.S. President Barack Obama will be faced with a
pivotal decision on oil sanctions on Iran, in which he will have
to balance the need to stay tough on Tehran without pushing oil
prices too high.
In considering whether to extend a new series of six-month
exemptions to Washington's oil sanctions, the administration
must decide whether China, India, South Korea and other nations
have done enough to wean themselves from Iranian oil.
Forcing cuts that are too aggressive could fuel a new rally
in oil prices, benefiting Iran and hurting allies. Accepting
meager cuts risks criticism from Congress and Israel.
The sanctions are aimed at slashing Iran's oil revenues to
pressure it to stop efforts to enrich uranium to levels that
could be used in weapons. Tehran has said its nuclear program is
strictly for civilian purposes.
On paper, the sanctions require Washington to continuously
tighten the screws on Iran's exports "toward a complete
cessation" of purchases, forcing importers to make deeper and
deeper price and volume cuts in order to win "exceptions," or
But the law allows the administration latitude to chart a
middle ground in the sanctions, which have already proven more
effective than some experts had forecast.
The sanctions require that importers must demonstrate that
they are making "significant" reductions every six months, as
measured by volume and price. What constitutes a "significant"
reduction is at the administration's discretion.
"The point of this is that we would like to see a consistent
and gradual reduction. That is the goal," said a U.S. government
official, who spoke on condition of anonymity.
Iran's oil exports hit a low of 860,000 barrels per day last
month, down from 2.2 million bpd at the end of 2011. That
reduction is already greater than some experts had forecast.
Critics are keeping close watch. Obama is expected to face
questions about whether he has been tough enough on Iran later
on Monday during a foreign policy debate with Republican
candidate Mitt Romney, their last debate before the Nov. 6
The New York Times reported on Sunday that the United States
and Iran have agreed in principle to private, bilateral
negotiations on Iran's nuclear program, but both nations denied
For countries including China, India and South Korea, the
deadline for new waivers is December.
Even a key proponent of sanctions said he wonders about the
need to force dramatically deeper cuts.
"We've probably reached the point of diminishing returns
with respect to Iran's oil exports," said Mark Dubowitz, the
head of the Foundation for Defense of Democracies, who has
pushed for stronger sanctions on Iran.
Dubowitz said it would take a great deal of work to cut
global imports of Iranian oil much below 800,000 bpd. Lawmakers
are now turning their attention to new types of sanctions that
could more quickly hit Tehran's foreign reserves.
A QUESTION OF "SIGNIFICANCE"
So far, all major oil importers have been granted the
exceptions. Without the waivers, the United States has the power
to blacklist foreign banks handling the oil transactions from
the U.S. financial system.
Precisely what qualifies as "significant" is kept
confidential, however, and may vary from buyer to buyer.
"The law is remarkably vague about what the baseline is,"
said Jeff Colgan, a professor at American University in
Japan had cut imports by 15-22 percent by the time it
received its first waiver in March. It subsequently cut imports
by more than a quarter each month except June, and won a second
six-month waiver for the U.S. oil sanctions in September.
Senators Robert Menendez and Mark Kirk who co-authored the
oil sanctions law last year have told the administration they
believe a minimum cut should be about 18 percent for any nation
seeking a waiver renewal, achieved through price discounts or
volume reductions, a point Menendez underscored in a recent
"We must make it clear - this is a big must - that absent
some extraordinary circumstance, that we will not grant waivers
to any nation that doesn't make our reduction benchmarks,"
Menendez told Reuters earlier this month.
The administration is likely to carefully weigh the cuts
required against the impact on prices, since price gains help
Iran, hurt allies, and harm the global economy, said Trevor
Houser, a partner with Rhodium Group, a New York-based policy
and economic consultancy.
"If you tighten the screws too hard and it causes oil prices
to spike, then you both undermine the effectiveness of the
sanctions and you erode support for the sanctions from other
countries," said Houser, a former State Department adviser.
Houser questioned how far Washington could push the
sanctions while also keeping oil markets relatively stable.
Saudi Arabia, which has been pumping oil at its fastest rate
in 30 years in order to make up for the diminishing exports from
fellow OPEC member Iran, has limited additional capacity to tap
if shipments fall further, analysts say.
The administration likely will face the most political
scrutiny for its decision on a renewed waiver for China. China
officially opposes the U.S. sanctions, but secured a waiver in
June after a contract dispute resulted in steep import cuts in
the first half.
Although its imports of Iranian oil rose in June to an
11-month high, they dropped in July and August to 25 percent
below the same months in 2011, the most recent months for which
data is available. China's first-half imports from Iran were
down 20 percent from a year ago.
"China is a very different story and that's where we fear
the administration will cook the books to give China a
'get-out-of-jail-free' card in order to avoid a showdown with
America's largest creditor," a senior Congressional aide said,
on condition of anonymity.
With much bigger trade issues at stake, American
University's Colgan believes a waiver for China is likely. "The
trade consequences are unknown and potentially very bad if they
start a trade war over this," he said.