U.S. BAN ON IRANIAN OIL PURCHASES WOULD BE FUTILE

Fereidun Fesharaki
Shiva Pezeshki
East-West Center Honolulu

There has been much talk in the press and political circles about the potential use of "U.S. money" by Iran to engage in international terrorism.

This U.S. money, it is argued, comes from U.S. companies that engage in oil purchases from Iran. Although the oil has never been brought into the U.S., it is argued that U.S. companies provide Iran with "blood money" to hurt U.S. interests.

The media talk has given way to political action by introduction of a bill in the U.S. Senate by Republican Sen. Alfonse D'Amoto, chairman of the Senate banking, housing, and urban affairs committee. His bill proposes to impose comprehensive economic sanctions against Iran, including a ban on purchase of Iranian oil by U.S. companies or their foreign subsidiaries.

WHO BUYS IRAN'S OIL?

Iran sells oil to a variety of customers in virtually every part of the world.

In 1994, Iran sold oil to 44 foreign customers in Europe, Asia, Africa, and Latin America, including nearly a dozen state oil companies.

Iran's oil trading network is well developed and managed professionally. Oil is sold according to established international arrangements. No oil is traded or gifted for political purposes, and the trade is generally above board.

In the first 6 months of 1991, practically no Iranian oil was purchased by U.S. companies. While Iran's oil exports were nearly 2.5 million b/d, U.S. company purchases were only about 0.4% of the total.

Did Iran have any problems selling the oil? No. The oil was sold in the international market to other buyers.

By 1993, U.S. oil companies' oil purchases rose to 641,000 b/d, or about 23% of Iran's oil exports, while Europeans bought 25% of Iran's oil. Japanese companies purchased lower volumes at 467,000 b/d.

In 1994, U.S. companies' purchases of Iranian oil fell to about 614,000 b/d, keeping the percentage share of U.S. companies flat. European and Japanese purchases were 19% each.

While all non-U.S. buyers were able to take the oil to their respective countries, U.S. companies were restricted to selling the oil in non-U.S. markets.

Contracts for Iranian oil make resale in the international market difficult because oil destined for Asia and Europe is sold at a different price formula, in line with international practices. As such, the oil sold is pretty much restricted to regional destinations and is generally imported for refining by end users or their representative traders.

What has happened is very clear: American oil companies have replaced Asian and European companies for oil purchased for refining in Asia and Europe. Rather than buying oil from traders, U.S. companies are able to engage in direct trade with Iran.

This is a simple case of displacement of one source for another, not an additional purchase or new revenues for Iran and not a new deal. For instance, a U.S. company that used to buy Saudi oil may now be purchasing more Iranian oil and less Saudi oil for refining in Europe, whereas European companies will be doing the reverse.

The recent fuss makes the issue sound like a great secret that has suddenly been discovered!

There is no mystery. The oil market is integrated. It does not matter who buys what from whom. The oil is sold in the market at the international price, not a discounted price.

Why do U.S. companies buy more Iranian crude? Is it because it is cheaper? Or are there ulterior motives?

The answer is simple. They buy the oil because this type of crude makes economic sense in their refineries. That is all! No private oil company will ever behave differently

WHO'S HURT BY SANCTIONS?

It may come as a surprise to some people to note that the U.S. has imposed more restrictions on free trade for political reasons than any other country in the world.

The temptation in the U.S. Congress to intervene in the world marketplace for political reasons has been great. In many cases, these interventions hurt U.S. interests more than the party they are intended to hurt.

Sanctions against Viet Nam were a major blow to U.S. companies.

While virtually every company in the world-from India to Malaysia to Australia, as well as Japanese and European companies-was given acreage, U.S. companies were forced to watch their competitors prosper. The Vietnamese did develop their oil industry.

When the ban was lifted, most of the good acreage was gone. Americans had to farm in at high entry prices with other foreign companies who were already in the country.

Has the embargo against Libya meant that Libya is not producing or selling oil? Not at all. Only Americans are cut off, but the industry continues to function.'

EFFECT OF SANCTIONS

Will banning U.S. oil companies from buying oil from Iran hurt Iran?

While there will be a very short-term need for readjustments, there will certainly be no difficulty in disposing of Iranian crude-although Iran may be psychologically bruised by such a ban.

just-as in the early 1991 period, Iran will dispose of her crude to other customers. Americans will be forced to buy crude less suitable, both technically and economically, for their refineries.

Will Iran have to sell oil at a discount if a ban is imposed?

No. If you sell oil at the international market price, which changes every moment, you need not give any discounts. A discount is possible only from a fixed price, not a floating market price.

Iran's oil income will not be hurt. The losers will be solely U.S. companies and their shareholders in the U.S.

And what about the "U.S. money" going to Iran?

It is not U.S. money. It is Japanese and European money because the refined products are sold in Japan and Europe. Without U.S. companies, the same Japanese and European money will flow to Iran. This is not U.S. money.

Is Iranian oil secretly shipped to the U.S.? No. The ban on imports of all Iranian goods is strict.

Some people talk about Iranian oil being refined elsewhere and imported into the U.S.

Once oil is refined, it can be sold anywhere as a product. It is virtually impossible to distinguish among products refined from one crude or another-especially because so many crudes are used in a refinery simultaneously

Are we sure no refined products from Libyan crude ever get to the U.S.?

The fact remains that no one is planning or plotting to refine Iranian crude for sale in the U.S. There is no economic incentive for such a plan, although it is not possible to say whether any products based on Iranian crude have or have not entered the U.S.

EFFECT ON EXPLORATION

Outside of oil purchases, this kind of ban would have a very negative impact on exploration, too.

U.S. companies, along with the Europeans, have been negotiating for acreage off Iran. Such agreements would open the door to vast oil reserves that, so far, have been closed to foreign companies.

American companies may be winning the race, but their years of effort can be jeopardized by this kind of ban.

Once again, U.S. government actions may result in Americans losing out because of mistaken assumptions about the implications of such a ban.

It is time to stop repeating mistakes. It is time to let U.S. companies use their ingenuity and freedom to operate by the rules of the free market of which the U.S. is so proud.

The proposed ban on Iranian oil will hurt U.S. companies and U.S. credibility, not Iran's oil revenues.