U.S. fuel sanctions to hurt Iran, a boon for traders

DUBAI/LONDON (Reuters) - U.S. sanctions against suppliers of fuel to Iran would drive up the price the Islamic Republic has to pay for imports and provide a big money-making opportunity for oil traders able to flout the measures.

Sanctions busting has proved lucrative in the past for the less scrupulous in the opaque world of oil trade and could do so again if new measures seek to limit sales into Iran.

“Oil flows are really determined by market forces rather than politics and that’s the bottom line,” said analyst Raja Kiwan of PFC Energy. “Politics can be an obstacle, but can’t block the flow.”

Iran is the world’s fifth-largest crude exporter but its refineries lack the capacity to meet domestic fuel demand so it imports up to 40 percent of its gasoline supplies. The U.S. and its allies may target those imports if Tehran refuses to enter talks over its nuclear program.

The West suspects Iran aims to make nuclear bombs, while Tehran insists it needs fuel for power plants.

The measures would disrupt supply patterns, stop some suppliers and force Iran to pay more for sellers to run the risk, analysts and traders said.

“Sanctions just make it more expensive and uncomfortable,” said Al Troner, managing director of Asia Pacific Energy Consulting. “That’s what you saw with South Africa and to some extent Saddam Hussein’s Iraq. The flow would continue but players would take on substantial financial and political risk.”

Higher import costs would impact the budget, which could hurt President Mahmoud Ahmadinejad. Government subsidies make Iran’s gasoline among the cheapest in the world. If imports cost more, more of the budget would be spent on those subsidies, leaving less cash to finance Ahmadinejad’s populist programs.

So even if the oil flow continues, sanctions may have the impact that the U.S. and its allies want.

Neta Crawford, a professor of political science at Boston University who studied the effect of oil sanctions against apartheid in South Africa, said even leaky sanctions there strained the economy and fractured the elites’ hold on society.

“Sanctions deny them their resource, force them to pay a premium for that resource, and then the cost of evading the embargo just means they don’t have the resources to do whatever it was they initially wanted to do,” Crawford said.

“Everything they do to evade sanctions becomes a huge tax. It creates these huge grey and black market economies, and people who wouldn’t have been empowered become empowered by making a whole lot of money.”


Some of the best-known names in the oil trade have made big money from supplying into countries under sanctions.

Billionaire commodities trader Marc Rich, a pioneer of crude oil trading and founder of the commodities trading giant that become Glencore, was pardoned by U.S. President Bill Clinton in 2001 after 17 years as a fugitive to avoid prosecution on counts including alleged illegal oil trading with Iran. U.S. politicians said he also illegally traded oil with Iraq, Libya, Cuba and South Africa.

The companies that sell fuel into Iran include Europe-based trading firms Vitol, Trafigura, Russia's LUKOIL LKOH.MM and Malaysia's state oil company Petronas, oil traders said.

India's Reliance RELI.BO has also supplied Iran, but has shipped nothing since May, traders said, possibly to avoid any future restrictions on sales to the U.S. under sanctions.

Well-policed sanctions may stop other firms, giving an opportunity to traders with limited exposure to the U.S. and other countries that agree to the sanctions.

“There are many one-man ship trading companies out there who can sleeve the business,” said one Singapore-based oil trader. “Are you going to sanction them? It’s not practical. It’s good for politics but it makes absolutely no sense.”

Of those that would lose a share of Iran’s 120,000 bpd of gasoline imports, Reliance would perhaps be the hardest hit, Troner said. Reliance has a giant new 580,000 barrels per day (bpd) refinery on the west coast of India.

It needs to keep the refinery running as it tests new units, and needs to sell bigger volumes even as global fuel demand declines due to the economic downturn.

The UAE port of Jebel Ali, where companies import gasoline and then blend it for export to Iran, would also likely see disruption to its trade, analysts and traders said.

Additional reporting by Luke Pachymuthut in Singapore; editing by Sue Thomas