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    Europe Must Choose Between an Iranian Oil Embargo and Default

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    Experts say that if Iran stops its oil deliveries to the European Union, the EU will need several weeks to find alternative suppliers. Britain and France, to which Iran stopped deliveries on Saturday, February 19, are unlikely to be hit hard, but Greece, which is tottering under the weight of its economic problems and is the largest importer of Iranian oil, will most likely have to declare a default.

    Experts say that if Iran stops its oil deliveries to the European Union, the EU will need several weeks to find alternative suppliers. Britain and France, to which Iran stopped deliveries on Saturday, February 19, are unlikely to be hit hard, but Greece, which is tottering under the weight of its economic problems and is the largest importer of Iranian oil, will most likely have to declare a default.

    On Sunday, Iran halted its oil deliveries to British and French companies after threatening on February 15 to stop its oil supply to France, Italy, Spain, Greece, Portugal, and the Netherlands in response to the EU sanctions. The Iranian Foreign Ministry had warned these countries’ ambassadors of this possibility. Hassan Tajik, director of the ministry’s Western Europe Department, told the ambassadors that Iran will not do this now for humanitarian reasons, “in light of the cold wave gripping Europe.”

    Iran threatened to cut short its oil supply to the EU in response to the EU’s embargo on Iranian oil, which was approved January 23 and stipulates that all EU members buying oil from Tehran are to stop imports by July 1.

    Greece, Italy and Spain account for about 68% of Iranian oil exports to Europe. These countries are also plagued by the worst economic problems in Europe. Moreover, Greece imports 35% of its oil from Iran.

    In 2011, EU countries bought an average of 600,000 barrels of Iranian oil per day.

    Saudi Arabia is the last hope

    If Iran stops oil deliveries to the EU within the next few days, Europe will have to search for a new supplier, and will have to do it quickly in light of the unusually cold February weather.

    “The European countries can use their fuel reserves to compensate for the halt on Iranian oil deliveries in the short term, but this will not resolve the issue,” Vitaly Kryukov, an analyst with the investment financial group Kapital, told RIA Novosti. “Europeans will still have to search for new suppliers.”

    Furthermore, these reserves are spread across Europe unevenly, which leads to logistical difficulties, said Konstantin Simonov, director of the National Energy Security Fund.

    Talks are underway with Saudi Arabia, which has said that it has spare oil it can deliver very soon. “Soon” in this case translates into a few weeks, said Valery Nesterov, an analyst with the Troika Dialog investment company.

    “Saudi Arabia’s additional reserves exceed 2 million barrels per day,” Kryukov said. “In principle, it can make up for curtailed Iranian deliveries.”

    “However, Europe could encounter technical difficulties, because each refinery is equipped to process a certain type of crude oil,” Nesterov said. “So it is not the case that Europeans will easily be able to replace Iranian oil with supplies from Saudi Arabia.”

    No alternative

    Experts say there is no alternative to short-term oil deliveries from Saudi Arabia.

    “Theoretically, oil can be delivered from Libya, which is not being mentioned, but its oil production has already almost returned to the pre-war level,” Kryukov said. “Libya is currently producing 1.3 million barrels per day, only 0.3 million bpd less than before the war.”

    He believes that by July 1 Libya could reach its pre-war level of oil production and exports. However, it probably has long-term contracts for oil deliveries to consumers in other countries.

    Also, Europe cannot expect to be rescued by oil from any African country, which might only be able to supply small amounts, Kryukov added.

    Southern European countries cannot view Russian oil as an alternative even theoretically, said Konstantin Simonov. “Russian oil companies are unable to occupy these wonderful niches,” he said.

    They would have to increase oil production to be able to make additional oil deliveries to the EU, he said. Even if Russia had “surplus” oil, it would face problems transporting it to southern Europe. Russia’s idea to build a Burgas-Alexandroupolis pipeline to Greece has been recently buried.

    Europe will pay with a Greek default

    The oil confrontation could cost Europe dearly. “The sanctions will lead to a hike in oil prices, which will in turn increase other prices in Europe and across the world,” said Iranian Interior Minister Mostafa Mohammad Najjar.

    Experts differ in their predictions of oil prices. Simonov believes that the confrontation will increase oil prices, while Nesterov said that “oil prices are unlikely to change much.”

    “The Iranian factor has already been included in the price of oil,” Nesterov said, adding that Europe’s economic problems are causing oil prices to decrease due to falling demand.

    Many countries may not even notice a change in oil prices, but the main consumers of Iranian oil will definitely have huge problems. “The economic situation in Greece is bad as it is, and the oil problem would come as a crushing blow,” Simonov said. He believes that in this case Greece would definitely withdraw from the euro zone.

    “Greece will have to search for a new oil supplier, will have to offer to pay more, and its economy will not survive,” the analyst said. “Hence, the Greek government will have to approve further budget spending cuts, provoking new riots. In fact, Greece may have to declare a default.”

    In this case, strong European economies will either have to help Greece or allow it to leave the euro zone, which could pose an existential threat to the zone.

    Iran: A hostage to its own oil policy

    However, Iran’s decision to suspend oil deliveries to the EU would boomerang back at its own economy, doing much more harm to it than it could theoretically do to the European economy. The reason is that Iran’s budget heavily depends on oil exports, Nesterov said.

    “Its budget shortfall could run into the tens of millions of dollars a day,” he said. “Oil and petrochemical exports account for 70%-80% of Iran’s revenues. Its economy is even less diversified than that of Russia.”

    Simonov believes that oil revenues account for 60% of the Iranian budget, “because it is by far Iran’s largest, even if it is not its only, export item.”

    Besides, Iran will need to negotiate the sale of its crude oil, initially intended for Europe, with China and India, possibly at a discount.

    China has already started its game, which could undercut both Europe and Iran. “Iran thought that it could easily redirect its oil exports from Europe to China, the largest consumer of its oil, and partly to India,” Simonov said. “It thought that China would increase its purchases for domestic consumption and also for creating strategic reserves.” But China has reduced its oil imports from Iran by half while at the same time increasing its imports of Saudi oil.

    “China has two goals: to play against Europe by preventing it from buying Saudi oil in the needed amounts, while at the same time forcing Iran to cut its prices of crude oil,” Simonov said. “In fact, Iran has painted itself into a corner: it expected the buyer of its oil to increase its purchases, but the buyer has knocked the wind out of Iran.” No matter what you think about Iran’s political regime, China definitely acted treacherously, the expert said.

    Both Iran and the EU are trapped, and if the EU enforces its embargo, their losses will be huge.

    The views expressed in this article are the author’s and may not necessarily represent those of RIA Novosti.

     

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