Noose tightens around Iranian oil exports

The United States is pressing Saudi Arabia to increase oil output with a view to filling a likely supply gap arising from sanctions on Iran. It has been reported that there were talks held between Saudi and the US and the US asked if Saudi Arabia could be accommodating once the sanctions take effect in July. "And the Saudi response was that it was ready to meet demand in the market if required, but would not like to take part in the politics," one Gulf official was quoted as saying. Already running close to record highs of about 10 million bpd, Saudi Arabia says it has the capacity to reach 11.4-11.8 million very quickly and could bring on another 700,000 bpd in 90 days to reach full capacity of 12.5 million bpd. A European Union embargo on Iranian crude takes effect on July 1. US and European financial sanctions have made it difficult for other importing nations to process payments for Iranian crude. Several European countries have already suspended their imports of Iranian crude ahead of embargo. The rationale and timing for Barack Obama administration's to request the Saudis to raise output is also aimed at upcoming US presidential elections. Obama's re-election efforts have compelled his administration to make the request given that the rising pump prices have become a major election issue. Several former US administrations have, over time, requested the Saudis to raise output for domestic political reasons and, on occasion, the Saudis have complied though by not as much as desired by the US. Former President Bush for example requested the Saudis twice to raise output so that American consumers could benefit however in 2008 the Saudis raised output by 300,000 barrels a day which, Bush stated, was not enough to lower gasoline prices in the US. This week the Energy Secretary Steven Chu backed down from his earlier comments that the US should put in place measures that would help raise gasoline prices during his testimony before the Senate Energy Committee: "I no longer share that view. When I became Secretary of Energy I represented the US government and I think that right now in this economic very slow return that we need to have these prices well could affect the comeback of our economy and we're very worried about that. And so, of course, we don't want the price of gasoline to go up. We want it to go down." In effect the Obama economic team holds the view that a rise in petrol prices would have negative consequences on domestic economic activity, as fuel is a major input for most productivity, and therefore growth. The Obama administration's domestic compulsions and sensitivities in relation to oil prices notwithstanding, the escalating US-Iran stand-off poses a serious strategic threat to region in particular because an increase in Saudi output to plug the shortfall of Iranian oil importing countries is not without some serious dangers to the stability of the Persian Gulf. Iran has already threatened Saudi Arabia against delivering additional oil to world markets to compensate for a drop in Iranian oil exports if they are hit by sanctions, Tehran made this warning about two months ago - a day after Saudi oil minister publicly pledged to boost the kingdom's production by as much as 2.7 million barrels a day, more than Iran exports, if there was market demand for more oil. Iran has threatened to close the Strait of Hormuz, used for a third of the world's seaborne oil trade, if pending Western moves to ban Iranian crude exports cripple its lifeblood energy sector. The situation is profoundly profound, indeed. New developments, it appears, seem to have come as a serious setback to hopes that generated Iranian supreme leader Ayatollah Khamenai's praise for Obama's strong advocacy for diplomacy and not war as a resolution to the present crisis, which was widely rated as a rare positive signal in long-standing transactions between Tehran and Washington. That 80 percent of Iran's export revenues are through sale of crude, the European embargo is tantamount to strangling Iran's economy, fanning fears of a slide into wider Middle East war. Although, Obama has warned Iran that the window of diplomacy is 'shrinking', the US must not withdraw from its commitment of giving diplomacy some more time to help resolve the stand-off between Tehran and Washington with a view to defeating the nefarious designs of all drumbeaters, including Israel, for Iran war. Economic sanctions on Iran should not translate into an end of diplomacy. Copyright Business Recorder, 2012