Psychological pressure of EU sanctions

Posted on November 1, 2012


The EU sanctions have been pressuring Iran for quite some time already, from nearly every possible angle. While Iran has not yet developed nuclear bomb, the country did not completely halt its nuclear program either.

Islamic Republic’s nuclear program, which as the country says, is only for peaceful purposes, has caused a lot of worries and concerns among Western states, following which, Iran got hit with numerous sanctions that intend to stop the program’s further development.

The latest EU sanctions on Iran’s gas have affected country’s exports of liquefied petroleum gas (LPG). The reason for that is quite simple – psychological pressure.

LPG traders do not want to take on the risk of trading Iran’s goods, with all the sanctions working in full force, and because they are not sure whether dealing with LPG in particular has been sanctioned.

LPG, which comprises propane and butane, is prepared by refining petroleum or “wet” natural gas, and is almost entirely derived from fossil fuel sources, being manufactured during the refining of petroleum (crude oil), or extracted from petroleum or natural gas streams as they emerge from the ground.

The shippers, traders and insurers, who have been having their portion of problems dealing with Iran, simply are steering clear of Iranian supplies due to uncertainty over the scope of the new European Union sanctions.

In case with shippers, they simply do not want to touch any trade that could risk business with clients such as major oil firms.

Similar situation can be observed with Iran’s imports of medicine, which is not on the sanctioned list, and yet the Islamic Republic is facing some problems with imports, mostly because of the incoming shipments.

In October, the EU announced tighter restrictions on trade with Iran, adding to already comprehensive international sanctions aimed at forcing Tehran to halt its nuclear program.

Iran continues to deny everything, claiming its program is purely for peaceful purposes, however this alone is not enough to help the country to improve its crippled economy.

Officially, the gas sanctions became binding on EU governments from October 16 but technically they do not apply to companies until detailed legislation is prepared and issued.

In the absence of hard and fast EU rules, Iran’s LPG customers outside the EU are acting cautiously due to the uncertainty, with the result that shipments are drying up.

Previous U.S. and EU measures slashed Iran’s crude oil exports, hitting its hard currency earnings and contributing to a plunge in the rial’s value. The International Energy Agency estimated its crude exports at 860,000 bpd in September, down from 2.2 million bpd at the end of 2011.

Before the sanctions, Iran exported almost four million metric tons of LPG a year, worth over $4 billion at current market prices.

After South Korea, Norwegian energy giant Statoil was the main buyer of Iranian LPG, according to industry sources.

If the official decision on Iran’s LPG is made, the Islamic Republic can expect some of its clients cutting down the LPG imports, or halting them completely.

One of the consequences for such crucial decision is that that the sanctions are likely to push up Europeans’ energy bills as winter nears.

Europe is already facing a supply crunch for heating and diesel fuel, and is likely to to find itself struggling for supplies of yet another winter fuel if buyers in South Korea and elsewhere try to make up for their loss of Iranian LPG on the open market.

According to Reuters, Iran had been exporting LPG on six or seven Very Large Gas Carriers (VLGC) per month – between around 275,000-325,000 metric tons or nearing 4 million metric tons a year.

South Korea imported LPG worth more than $1 billion in the first eight months of 2012, according to data from the Korea International Trade Association. Iran provided 37 percent of its propane imports and 22 percent of the butane.

South Korea would look for alternative supplies from Saudi Arabia, Qatar and the UAE if it could no longer import from Iran, a source at a buyer of Iranian LPG said.

As soon as, or if, there is a clear word on Iran’s LPG, Iran will be forced to look for new buyers, and Europe – prepare for a much colder winter.

Until then, psychological pressure of the sanctions continues to spread across the globe.