Iran has threatened to close the Strait of Hormuz
On 21 February, the European Union announced a phased-in embargo on Iranian oil. It will be in effect from 1 July this year.
How did Iran respond? Well it stopped oil exports to Britain and France. But this was no more than a symbolic two-finger salute. Because neither country has bought Iranian oil since last November.
However, Carsten Fritsch an analyst at Commerzbank points out,
‘… Iranian oil exports to both these countries are virtually negligible, however the news is likely to have only a psychological effect, fueling uncertainty on the oil market’.
In short, it will push up the oil price.
The rising oil price has concerned Didier Houssin, a director for energy markets from the International Energy Agency. He told Dow Jones Newswires,
‘…there are alternative supplies that can make up for any loss of Iranian exports.’
He believes both members and non-members of the Organisation of Petroleum Exporting Countries (OPEC) will make up the loss.
Houssin added that Iran provides about 2.2 million barrels per day (mbpd) of crude oil to the worldwide market. And there’s currently an extra 2.82 mbpd that could come from OPEC members.
Does that mean it’s a case of panic over, move along, nothing to see here?
In fact, things could get worse.
As Dr Alex Cowie wrote recently in Money Morning, Iran has threatened to close the Strait of Hormuz. At its smallest point, the Strait of Hormuz is barely 50 km wide. But it’s vital to oil shipments.
This tiny bit of ocean sees more than one fifth of the world’s crude oil shipped through it. Closing the Strait would cut off oil from Saudi Arabia, Kuwait, Iraq and Qatar.
And Iran knows exactly the effect it would have on crude oil prices. Societe Generale estimates closing the Strait would see oil prices spike to $150-200 per barrel!
If that happens, there’s a pretty good chance America will make some serious military threats.
But Iran’s not worried. Because Iran has China on its side.
Unless China joins the ban on Iranian oil, it won’t have much of an effect on Iran’s exports.
Source: US Energy Information Administration / BBC news
The thing is, since the start of the century China’s spent billions of yuan ensuring a steady stream of black gold from Iran. Why would it hurt its own strategic assets?
China Protects Iran
China has spent the better part of the last decade securing its oil supply.
In 2004, China’s government-owned Sinopec signed a $2 billion deal to develop the Iranian Yadavaran oil field. It has estimated reserves of 3 billion barrels. And when production starts, it will supply over 300,000 barrels of oil a day. Funnily enough, that’s the amount of oil per day that China imports from Iran.
Less than five years later, the same company signed another $6.5 billion deal with Iran. This time to build oil refineries. Iran only has one refinery to alter the crude oil into petroleum. Adding another 6 refinery’s would see the country’s refining capacity reach 3.2 million barrels per day. Up from the current 1.67 million.
Iran imports about 120,000 barrels of petrol. And China is responsible for refining one third of Iran’s petrol needs. So, if Iran refines its crude, it wouldn’t need to rely on petrol imports.
But China’s outlay in Iran doesn’t end there.
The other big oil firm in China, China National Petroleum Corporation, has been shopping. In four years, the company has signed three separate contracts worth $4 billion to explore, drill and pump out oil. Combined they’ll add another 300,000 barrels of oil a day. Mostly for Chinese use.
And these are just the oil deals. There’s also the multi-billion-dollar deals for Iran’s gas fields.
In fact, over the next 25 years, China could pump over $100 billion into the Iranian economy through exploration, refinery development and oil and gas purchases.
And you can guarantee any country that spends that amount of cash in one spot will protect its assets.
According to CNN, ‘China is allowed to deploy to Iran as many experts and security personal as it deems necessary. To date, over 11,000 Chinese nationals have arrive in Iran, majority of whom consisting of non-uniformed military personnel.’
In other words, China has a military presence in the region, without having a hostile military presence.
Cutting off oil supplies to other nations will benefit China, and in the long term, Iran. With few other buyers in the pipeline willing to risk American ire, China should be able to scoop up excess crude and perhaps even buy another oil field or two.
Whatever sanctions the US places on Iranian oil, you can guarantee that China will be looking after its investment. Don’t expect China to jump onto the embargo anytime soon.