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Targeting Iran's Energy Sector Isn't Working

Asian consumers are expected to help the Iranian oil sector recovery briefly this month. The U.S. State Department in March lauded Japan for its "significant reductions" in crude oil exports, which qualified it for an exemption from economic sanctions. Iranian crude oil deliveries to Japan are expected to rebound, however, as some of the country's refineries return to service after maintenance shut them down last month. Sanctions are meant to starve Iran of the revenue it needs to support nuclear research programs. At the very least, multilateral negotiations in Kazakhstan last weekend may have kept the conversation moving in a direction favorable to Western powers.  With Iran declaring Tuesday it would advance its nuclear programs, however, it seems that economic pressure isn't a strong enough tool to push the Islamic republic into a corner.

U.S. Secretary of State John Kerry said last month that concerns over Iran's nuclear program meant pressure on its oil economy needs to continue. Despite the sanctions pressure, however, Iran remains at least attached to the proverbial cogs of the international oil sector. Countries like Japan and some members of the European Union can get a waiver from sanctions if they post "significant reductions" -- rather than a complete stoppage -- on the amount of crude oil they buy from Iran. Japan last month, as well as 10 members of the EU, qualified for a sanctions waiver. Kerry said that, by keeping customers at bay, Western powers are sending a clear message to the Iranians: "take concrete actions to satisfy the concerns of the international community, or face increasing isolation and pressure."

Related article: Iran Abandons Chinese Help, to Build World’s Highest Hydroelectric Plant Alone

Yet Iran's crude oil exports for the month are expected to recover, albeit temporarily, to more than 1 million barrels per day.  Asian refiners are expected to drive that push. South Korea is expected to lead the pack in terms of increases, nearly tripling its May crude oil purchases. Taiwan, meanwhile, goes from naught to around 67,000 bpd, though China leads consumers of Iranian crude oil by leaps and bounds with an estimated 415,000 bpd for April. Analysts expect the increase to be short-lived and not indicative of an emerging trend, but they mark an increase nonetheless.

The five permanent members of the U.N. Security Council, Germany and Iran met last week in Kazakhstan for two days of nuclear negotiations.  U.N. nuclear inspectors this year expressed frustration when they couldn't gain access to the Parchin military complex outside Tehran. The IAEA said it was concerned there may be military aspects to parts of Iran's nuclear program, thought it stopped short of saying the program was aimed at weaponization. Nevertheless, EU foreign policy chief Catherine Ashton said both sides were "far apart" on the measures needed to ensure Western powers that Iran's program is for peaceful purposes, a claim that Tehran refuses to abandon.

Related article: Oil Exporters Must be Wary of Dependence on Oil Revenues

Iranian crude oil exports for April are still down more than 30 percent compared to the same time last year. The increase in crude oil exports for the month is likely something of an anomaly, though it's uncertain just how much of the economic pressure is swaying Iran's decisions.  The Iranian government wants assurances its international right to nuclear research, including uranium enrichment, is guaranteed. Western powers, for their part, say Iran needs to offer something in return for looser sanctions, like suspending enrichment. Five years ago, Iran was five years away from a nuclear weapon and Kerry said that, after years of diplomatic shell games, the process was not "endless." While the latest stalemate from Kazakhstan will likely lead to even more sanctions, it's clear that nothing short of all-out isolation will work with Iran.

"Iran has gone nuclear," said Iranian President Mahmoud Ahmadinejad. "Nobody will be able to stop it."

By. Daniel J. Graeber of Oilprice.com


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