Iran refinery - AP - 23.4.12
An Iranian oil worker repairs a pipe at an oil refinery in Tehran in 2007. Photo by AP
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As the latest round of sanctions against Iran enter its second week, the government in Tehran is trying to put on a brave face, especially regarding the major reduction in its oil exports. The semi-official Mehr news agency reported over the weekend that Iran is planning to export 20 percent of its oil through a consortium of private firms in order to get around the embargo. This report is rather fishy.

For a start, in a highly regulated sector such as the international energy marketplace, you don't just all of a sudden sign contracts for marketing 400 to 500 thousand barrels of oil a day. Anything of this magnitude will immediately be noticed and flagged. It will be clear that this is Iranian oil and subject to embargo, and no Western buyer will touch it. Other countries are less concerned about flouting the sanctions, but for them there is no need to use a private consortium.

Hassan Khosrojerdi, who is identified in the report as the "head of the union of exporters of oil derivatives," is quoted as saying that “negotiations have been conducted with some European refiners and a deal has been done." But there can be little doubt that this is propaganda - probably meant for internal consumption - though also translated into English, and has little chance of ever happening, if any Iranian oil executive actually planned it to begin with. In reality, much of Iran's oil is going nowhere and with the storage facilities on land full up, Iran is now using its own mainly idle tanker fleet as floating storage.

For now, Iran has lost its European customers and the sanctions resolution does not leave them a way to smuggle the oil through. The big question is how will its large Asian customer base, which isn't obligated by the EU sanctions, act. The other major effect of the European and U.S. sanctions are the withdrawal of maritime insurance coverage from any tanker ship, no matter what nationality, that transports Iranian oil. Since most of the insurance policies are issued in London, or reinsured by British companies, this causes a major problem for countries like Japan, where the government has been forced to allocate billion of dollars from their own funds to cover its tankers. It also creates a lucrative opportunity for Chinese shipping companies - the only ones not to use Western insurance coverage. A number of Chinese firms have willingly taken up the slack, shipping Iranian oil back home and to other Asian destinations.

This raises the tantalizing possibility of seeing China in a position to save, or doom, Iran's prospects of withstanding the sanctions. China is a party to the P5+1 talks between Iran and the international community, and while its representatives remained for the large part out of the limelight, its position was broadly similar to the Russian one: against applying too much pressure on Iran to give up its uranium enrichment program. But unlike Moscow, Beijing is less committed either way and can still decide to ally itself with either side.

If China decides to continue supporting Iran's efforts, that may not be enough. China, itself going through an economic slowdown, is contracted to buy oil from a number of producers and cannot all of a sudden buy up Iran's entire surplus. In addition, Iran has been forced to slash its prices, offering China rock-bottom rates on its oil, so even a raise in Chinese purchasing won't refill its depleted coffers.