CLINTON TO ORDER HALT TO ALL U.S. TRADE WITH IRAN

President Clinton will soon order a halt to all trade and investments between the U.S. and Iran. The cutoff will apply to U.S. oil service and supply companies, as well as Iranian oil purchases by foreign subsidiaries of U.S. companies. Clinton explained that Iran continues to sponsor terrorism, to undermine the Middle East peace process, and is trying to develop nuclear weapons. But he rejected proposals for a "secondary boycott" that would prevent foreign firms that trade with Iran from

May 8, 1995

6 min read

President Clinton will soon order a halt to all trade and investments between the U.S. and Iran.

The cutoff will apply to U.S. oil service and supply companies, as well as Iranian oil purchases by foreign subsidiaries of U.S. companies.

Clinton explained that Iran continues to sponsor terrorism, to undermine the Middle East peace process, and is trying to develop nuclear weapons.

But he rejected proposals for a "secondary boycott" that would prevent foreign firms that trade with Iran from trading with the U.S.

"I think that would cause unnecessary strain with our allies at a time when we need our friends' cooperation," he said.

Clinton said the decision to halt trade was difficult because his administration has worked to open new markets abroad for U.S. companies. "But there are times when important economic interests must give way to even more important security interests. And this is one of those times."

The U.S. already limits imports from Iran and the export of sensitive goods to Iran. It recently blocked a Conoco Inc. subsidiary from developing oil fields off Iran (OGJ, Mar. 27, p. 25).

Where Iran's Crude Oil Exports Go chart (27712 bytes)

WHAT IT DOES

Clinton's executive order will ban all trade with Iran by U.S. persons or companies or their overseas branches and any new U.S. investment in Iran.

U.S. exports to Iran carried a value of $326 million last year, about half of which was sold by oil service companies. U.S. oil companies and their foreign subsidiaries bought about 20% of Iranian crude oil exports, although none of the oil was destined for the U.S. because of an import ban.

Clinton's new order, which will be modeled on the order banning trade with Libya, will have a 30-day transition period for existing contracts. The Treasury Department will administer a licensing program to allow companies with contracts to wind them down.

The order will apply to foreign operations of U.S. companies but not to purchases by foreign subsidiaries of U.S. firms if the subsidiary is "totally independent from the U.S. parent in terms of any kind of business activity."

A White House official explained why: "Our allies have strenuously, consistently objected to extraterritorial application of American law to companies in foreign countries.

"And a judgment was made here that we did not want to engage in a their efforts to counter our extraterritorial assertion of jurisdiction but rather keep the focus on Iran."

The order will apply to imported petroleum products refined overseas from Iranian oil, but the administration said most such products are consumed in the nation where they are processed.

A White House official said "What we're focusing on is the ability of U.S. companies to purchase Iranian crude in the international market, then sell it overseas. That's the business we're stopping, and it is true we cannot say we know for sure we're going to stop 100% of it."

Iranian Crude Oil chart (22426 bytes)

CRUDE OIL SALES

A U.S. Energy Information Administration spokesman said while Iranian crude oil was sold on the spot markets during the early 1990s, most of Iran's major customers have returned to the term contract system.

"Over the past several years," he said, "Iran has maintained its sales volumes to large international companies. However, it has recently lost several major customers that were key buyers."

EIA figures show Iran exported an estimated 2.6 million b/d in 1994, of which 35% went to foreign oil companies or subsidiaries based in Europe, 32% in Asia, 23% in the U.S., and 10% in South Africa.

"U.S. companies which currently have term contracts to purchase Iranian crude oil are Exxon 250-300,000 b/d, Coastal 130,000 b/d, Bay Oil 70,000 b/d, Caltex 60,000 b/d, and Mobil 40,00050,000 b/d.

"The majority of this crude oil is destined for refineries in Europe and Asia. None of the crude bought by U.S. companies is imported into the U.S."

REACTION IN WASHINGTON

Congressmen and witnesses at a House international economic policy and trade subcommittee hearing last week were mostly critical of the impending ban.

Chairman Toby Roth, (R-Wis.) said, "I am concerned that we're shooting ourselves in the foot." He said Iran owes U.S. companies $400 million. "What chance is there that Iran will pay these bills?"

He said Iran's largest trading partners are Japan, Germany, Italy, France, and South Korea. None has said they will follow the U.S. action.

Rep. Peter King (R-N.Y.), who drafted a bill for a secondary boycott against foreign companies trading with Iran, said Clinton's action is not enough.

King said U.S. oil companies that buy Iranian crude "can make whatever excuses they want, but the shameful truth is that they put profits before patriotism and blood money before the national interest."

Patrick Clawson, with the Institute for National Strategic Studies, said Iran will have no trouble finding new buyers for its oil.

"But the loss of access to U.S. firms will have a price for Iran. U.S. firms are prepared to offer slightly better terms than firms from other countries, which is exactly the reason Iran has been selling to those U.S. companies." He said Iran's loss could amount to $50 million/year.

He also said the planned embargo would hamper oil swaps. U.S.-led groups producing oil in Kazakhstan and Azerbaijan plan to ship oil across the Caspian Sea for use in Iran's northern cities in exchange for Iranian oil delivered on the Persian Gulf.

Arthur Downey, a Baker Hughes Inc. vice-president, testified at the House hearing on behalf of the National Foreign Trade Council, an association of more than 500 U.S. companies engaged in international trade and investment.

He said, "Over a great many years, the U.S. has tried unilateral embargoes, and the evidence is overwhelming that they simply do not work. Indeed, most studies show that costs are greater for the U.S. than for the targeted country."

He said the embargo will help U.S. companies' overseas competitors and convince foreign customers that U.S. firms are unreliable suppliers.

John Lichtblau, chairman of the Petroleum Industry Research Foundation Inc., New York, said Iran is an attractive oil investment area because neglect of its fields has reduced production to 3.6 million from 5.5 million b/d during the past 15 years.

He said the embargo would hurt U.S. companies, not Iran. Even if the embargo succeeded in reducing Iranian oil exports 50%, or 1.3 million b/d, that could reduce available world oil exports by nearly 4% and cause a price increase of about $4/bbl, or 10/gal in product prices.