March 1 (Bloomberg) -- Excluding Iran from the global oil market would increase the shortfall between worldwide supply and demand sixfold, based on February production and consumption estimates, the U.S. Energy Department said.
Global fuel use averaged 3 million barrels a day more than output when Iran is excluded from the calculations and 500,000 more when Iran is included, the department’s Energy Information Administration said in a report yesterday.
The examination of oil and fuel supplies and prices with and without Iran was prepared to help guide President Barack Obama’s administration in determining the feasibility of imposing sanctions related to Iranian oil trades through its central bank. Yesterday’s report was the first assessment issued under a Dec. 31 law that requires the EIA to provide an update on oil market conditions every 60 days.
“The EIA report highlights how tight the global market is,” Trevor Houser, an energy analyst and partner at Rhodium Group, a New York-based economic research firm, said in an interview. “With oil inventories and spare OPEC production capacity running low, consumers don’t have much buffer against additional disruptions in supply.”
OPEC spare oil production capacity dropped 33 percent in the first two months of this year compared with same period in 2011, the report showed. The 12 members of the Organization of Petroleum Exporting Countries had an average 2.5 million barrels a day spare capacity during January and February, down from 3.7 million a year earlier.
A month from now, the president must make a determination based on the EIA report as to whether there is enough non-Iranian oil available to impose sanctions related to oil transactions with the central bank starting on June 28, according to the law.
The president has the authority to grant exceptions to countries that have significantly reduced the volume of Iranian oil purchases, and he may delay the implementation of sanctions if he determines based on the Energy Department reports that there is insufficient alternative supply to make up for the loss of Iranian barrels. The president also may waive sanctions if he determines it is in the U.S. national interest to do so.
Oil in New York surged to $109.77 a barrel in New York on Feb. 24, the highest settlement since May 3, as tensions escalated over Iran’s nuclear program. While Iran has said its atomic program is for civilian purposes, the U.S. and its allies say the country is trying to develop the capacity to produce nuclear weapons. Crude rose 8.7 percent to $107.07 a barrel in February.
“While the report shows what we’ve seen at the pump --some volatility in oil prices because of a variety of factors, including Iranian posturing -- it also shows that there is spare capacity to offset a decline in the production and sale of Iranian crude,” Senator Bob Menendez, a New Jersey Democrat who was a lead sponsor of the sanctions legislation, said in an e-mail yesterday.
Following a Nov. 8 report by United Nations inspectors that raised questions about Iran’s nuclear program, the U.S. and European Union have added increasingly stringent economic penalties, including U.S. sanctions on non-petroleum transactions with the Iranian central bank that take effect yesterday and an EU embargo on Iranian oil that starts July 1.
An array of restrictions on banking, shipping, insurance, ports, trade, commodities and energy transactions and ventures have severed or complicated many of Iran’s commercial ties to the outside world.
Iran, the second-biggest oil producer in OPEC, pumped 3.45 million barrels of oil a day last month, the lowest level since September 2002, according to data compiled by Bloomberg News, and exported an average 2.58 million barrels a day in 2010, according to OPEC statistics.
Turkey, which relies on Iran for half of its oil imports, is seeking to replace Iranian crude with purchases from Libya, the North African producer’s state-run National Oil Corp. said on its website.
Iranian officials have assured the public they will prevail in the face of sanctions. Deputy Oil Minister Ahmad Qalebani said yesterday Iran is exporting about 2 million barrels of crude a day and has an increasing number of buyers even as countries impose sanctions, according to the state-run Mehr news agency.
Effective yesterday, the administration must sanction foreign financial institutions that do business with Iran’s central bank unrelated to petroleum trade. Food, medicine and medical devices are exempted.
“The report confirms that the majority of the price increase in February is due to supply and demand factors, with Iran sanctions playing a much less significant role,” Mark Dubowitz, executive director of the Washington-based Foundation for the Defense of Democracies, said in an interview yesterday. “With tight oil markets, policy makers need to be careful in threading the eye of the needle.”
Dubowitz, who advised Menendez and Mark Kirk, an Illinois Republican who co-sponsored the legislation, warned that “policymakers need to ensure that they are not creating an embargo of Iranian oil but, instead, implementing these sanctions so that Iranian oil becomes a distressed asset.”
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