Tuesday, January 24, 2012

Europe at war with Iran, while the Zioconned EU passes the oil buck to China....

While MSM does not devote too much interest to international changes in the use of US$, it appears that the machinations of Russia, Japan China, Qatar, United Emirates, Iran and India to replace intermediary use of USD for trade is significant; far more significant than the location of the 5th Fleet, for there will be no USA attack on Iran, while the erosion of USD reserve status /petrodollar standards is far more important than anything else for the USA economy....

Europe at war with Iran, while the Zioconned EU passes the oil buck to China....
By Pepe Escobar

No one ever lost money betting on the foolishness of European Union (EU) politicos. And if you are an oil trader, rejoice - all the way to the bank; as expected, EU foreign ministers - meekly following the Barack Obama administration - have given a green light for a full Iranian oil embargo.

The embargo applies not only to new contracts but also existing contracts - to be voided by July 1, and includes extra sanctions targeting Iran's central bank and petrochemical exports to the EU.
It's always crucial to remember the embargo - a de facto European declaration of economic war - was forcefully proposed in the first place by the neo-Napoleonic "liberator" of Libya, France's President Nicolas Sarkozy. The official EU excuse for the economic war is "serious and deepening concerns over the Iranian nuclear program".

It didn't help that Moscow had already warned the EU to stop acting as mere pawns of Washington - once again shooting themselves in their Ferragamo-clad feet. The Russians know all there is to know about how this embargo may horribly backfire.

The EU defends its strategy - or economic war - as the only way to avert "chaos in the Middle East". Yet the economic war may end up sparking the full-blown war it is theoretically trying to avert; talk about an array of unintended consequences waiting in the wings.

And that leads us straight to the Strait of Hormuz drama. Tehran has repeatedly said that it would close Hormuz only if - and we should repeat - only if Iran is blocked from exporting its oil. This would represent a deathblow to the Iranian economy - totally dependent on oil exports - not to mention the regime controlled by Supreme Leader Ayatollah Ali Khamenei. Regime change is the real agenda of Washington and its European poodles (see
The myth of 'isolated Iran' Asia Times Online, January 19) - but that cannot be spelled out to global public opinion.

The tracks of my tears
Of the top five Iranian oil importers, four are in Asia; two BRICS members (China and India), plus US allies Japan and South Korea. It's fair to argue that all these importers would severely blame the Americans/Europeans for their provocations (in fact some are already doing that) should Iran consider blocking - or activating a series of mines - in the Strait of Hormuz.

The EU for its part imports around 600,000 barrels of oil a day from Iran; that's about 25% of Iran's daily exports of 2.6 million barrels. The top EU importer is Italy. Other key importers are Spain and Greece. All these Club Med countries, to put it mildly, are currently mired in deep economic mess.

The EU insists on spinning its so-called "dual track" approach towards Iran. Stripped of spin, dual track essentially translates in practice as "shut up, bow to our sanctions, stop enriching uranium and sit on the table to negotiate on our terms".

So when the EU's foreign policy head - the stupendously innocuous Catherine Ashton - spins about the "validity of the dual track approach", serious diplomats across the developing world can only interpret it for what it is; a joke. That's not exactly an incentive for Iran to renew nuclear negotiations with the "Iran Six" group (permanent United Nations Security Council members the US, Britain, France, Russia, China, plus Germany).

Meanwhile, the Lord of the European poodles - the Obama administration - is applying all sorts of pressure over Asian powers to stop buying Iranian oil. Fat chance. For all of them - including Japan and South Korea - it will remain business as usual; they need Iran's oil even more than the West.

Even BP - the sterling polluter of the Gulf of Mexico - has asked the Obama administration for an exemption from sanctions. It all has to do with a key Pipelineistan chapter - the development of the immense Shah Deniz II gas field in Azerbaijan.

There's no way Europe can benefit from Caspian Sea gas without a massive $22 billion investment to develop Shah Deniz II - of which Iran holds a 10% participation. Shah Deniz II would be essential to supply the Nabucco pipeline - if it ever gets built. Nabucco bypasses Iran's strategic ally Russia - which happens to maintain a stranglehold over Europe's gas supply, as Europeans themselves never cease to complain in Brussels.

If Iran blocks it, the deal dies. So we have a post-surrealist situation of Britain's Big Oil - via BP - imploring for the US to exempt it from sanctions, otherwise European energy security will be at risk. Britain also happens to be an implacable foe of Tehran's regime, but still relies on Iran to "save" Europe from the claws of Gazprom. You can't make this stuff up.

The City never sleeps
The name of the game in Iran will always be regime change because the perennial wet dream of Washington and the European poodles is to grab Iran's fabulous oil (12.7% of global reserves) and gas wealth. And the fact is that wealth is increasingly profiting the Asian Energy Security Grid - and not the West.

The huge North and South Azadegan fields - 26 billion barrels - are being exploited by - who else - China; China National Petroleum Corporation is developing both, investing $8.4 billion over the next 10 years. As for the Yadavaran field, it is being developed by the China Petroleum & Chemical Corporation; in four years, it will be producing almost 200,000 barrels a day. And all this without even mentioning the largest gas field in the world - South Pars, of which Iran holds a great portion, alongside Qatar.

And then there's the crucial petrodollar front. Dominique Strauss-Kahn (DSK), slightly before he was forced to resign as the International Monetary Fund's director general over a sex scandal, was insisting on the end of the US dollar as the world's reserve currency, proposing instead the IMF's special drawing rights - the IMF's virtual currency including the US dollar, euro, pound, yen and yuan.

Well, it's already happening, via other means. Memo to an asleep at the wheel Washington/Brussels axis; China and India are already bypassing US/EU sanctions on Iran.

Three BRICS members (Russia, India and China), plus Japan and Iran - a mighty mix of the world's largest producers and consumers of energy - are already trading, or about to trade, in their own currencies. Russia and Iran have just started trading in rials and roubles. All of these powers have bilateral agreements - inexorably surging to multilateral; and that translates as the US dollar slowly fading as the global reserve currency, with all the seismic consequences this implies.

It's as if a stunned world was watching a ritual seppuku in slow motion committed by the Washington-dominated West.

There is also the auspicious orange in this Year of the Dragon pie - the upcoming foreign exchange bourse trading in yuan in the City of London. Beijing wants it - and the City badly wants it. Tehran already sells oil to Beijing in yuan. Think of Iran using the City foreign exchange to use their yuan and thus keep access to all global markets - no matter the US/EU sanctions/embargo avalanche.

Obviously, City players are aware that a "free trade" yuan bourse in London may play to Iran's advantage; but unlike those morons in Brussels, at least City slickers are aware that business is business.
Monday's decision by European Union foreign ministers to quickly turn the taps off crude oil imports from Iran will dramatically add to the pressure on Tehran to negotiate over its nuclear program.

The EU agreement will close off Iran's second-biggest market for crude oil, responsible for a fifth of oil exports. Without concessions for cash-strapped Greece or Italy, the decision forces the pace of decision-making in Tehran. Crude oil exports generate 80% of Iran's foreign earnings, without which Iran cannot pay for imports.

The US-sponsored sanctions movement means Tehran's options are constrained. Iran's next biggest oil customer is Japan, which buys 14% of exports, but the country's finance minister has already signaled that Japan wants to take steps to reduce that share. South Korea's deputy foreign minister has also indicated support for the international embargo policy, which puts another 10% of Tehran's crude exports on a declining trajectory.

India, which buys 11% of Iranian exports, might provide relief, but banking sanctions and a semi-convertible rupee mean the country's refineries already struggle to pay for the oil they do import.

That leaves China, Iran's biggest oil customer, in an exceptionally powerful position. With EU markets out of play, and no likely respite from other Asian countries, what China decides to do with its 22% share of crude oil exports will likely make or break Tehran's hopes for economic survival. But following the EU decision, Chinese leaders find themselves in an acutely uncomfortable position: they are now the arbiters of a sanctions policy they have publicly denounced.

China's choice
Although they don't welcome the situation, Chinese leaders have a genuine choice about how to act, and there are upsides to both courses. If they decide to play ball with the West's sanctions, then Iran's fate looks sealed, and Tehran will either have to negotiate or pursue diplomacy by other means - presumably in the Strait of Hormuz.

Either way, China will get the credit for forcing change, and its ships won't have to do the fighting.

Alternatively, China could decide to not play ball, and help their refineries cash in on the situation. According to Bloomberg and other news agencies, Chinese executives at China International United Petroleum & Chemicals (Unipec), the trading arm of refining giant China Petroleum & Chemical Corporation (Sinopec), are already negotiating heavy discounts from the Iranian National Oil Company (INOC), which now has more oil than it can sell.

And if Western governments don't like China buying cheap crude at their expense, China can point at the already high spot price for crude, and ask them to speculate on what would happen if they didn't.

Deftly managed, China could even have it both ways. By negotiating a discounted price but maintaining last year's volumes of approximately 550,000 barrels per day (bpd), Chinese executives and officials can achieve the desired effect of oil sanctions by forcibly lower Iranian foreign earnings, but without disturbing Chinese import volumes.

China could also seize this once-in-a-generation opportunity to cheaply augment its strategic oil reserves, which might be easier to hide from Western governments since increased import volumes would not show up on companies' monthly refining statistics.

Rule number one: Don't take sides
For the moment, Chinese leaders are inviting the plague on both houses. Last Friday, Chinese Premier Wen Jiabao bluntly warned Iran that China "... adamantly opposes Iran developing and possessing nuclear weapons", while also vigorously defending his country's right to "legitimate trade with Iran".

But it does appear that Chinese oil companies are playing hardball with Tehran. Bloomberg has reported that Unipec executives in Tehran have, unusually, still not finalized 2012 import contracts with INOC. And last week, the Washington Post reported that daily January exports to China had so far dropped by almost a half to 285,000 barrels per day (bpd), although an Iranian-filled 2 million-barrel capacity tanker was due in at Caofeidian, Hebei province on January 23.

Awkward straits
Opportunities aside, Beijing has difficult waters to navigate, and three particularly dangerous cross-currents.

The first is commercial, in the form of America's Comprehensive Iran Sanctions, Accountability and Divestment Act 2010, which gives the US executive the power to prevent any company active in Iran's petroleum sector from receiving US export licenses or borrowing more than US$10 million from a US bank.

On January 12, the Barack Obama administration decided to enforce these provisions against a Chinese company, Zuhai Zhenrong, which the US State Department says brokered the sale of 500,000 tons of petroleum in 2010.

Although the action won't affect Zuhai's business, bigger companies will take notice. Chinese companies have invested heavily in Iran, helping the country revitalize its sanctions-worn industries. In particular, Sinopec and China National Petroleum Company have signed huge exploration deals, for the Yadavaran and South Pars fields. These companies do not want to block themselves out from the US market.

Erica Downs, a China energy specialist at the Brookings Institution, says US officials are privately pressuring Chinese companies and that a tacit agreement has evolved - don't make new investments, or "back-fill" Iranian contracts vacated by other foreign companies, and we will leave your current businesses alone.

Scaring the bankers
The second difficulty is financial sanctions, in the form of the US National Defense Authorization Act 2012, which Obama signed on December 31. The act prescribes sanctions against any company that deals with the Iranian central bank, through which all international oil payments are now settled.

Although it comes with discretionary presidential waivers to ensure the oil spot price isn't sent rocketing out of control, the act's deterrent effect was immediate and global. As Akihiko Tembo, chairman of Petroleum Association of Japan commented, "No matter what the Japanese government says, we can't keep doing business with Iran, once the banks pull back from transactions."

And since processing oil payments is low-value business for banks, the likelihood is that most will quickly withdraw from dealing with Iran. Chinese banks don't want to be locked out of US markets either.

Unwarranted responsibility
The third, and potentially biggest, problem for China is that the country may become accountable for the spot price of oil.

According to an analysis by New York analysts Rhodium Group using November International Energy Agency data, the Organization of Petroleum Exporting Countries has unused production capacity of approximately 3.9 bpd, but any sudden shortfall would have to be met by members of the Gulf Cooperation Council (GCC) - Saudi Arabia, Kuwait, Qatar and the United Arab Emirates - which have spare capacity of about 2.5 million bpd. This is almost exactly equal to Iran's current average daily exports, estimated at 2.2-2.5 million bpd.

However, if all the 1.2 million bpd of Iranian crude currently shipped to Europe, Japan and Korea is replaced by increased GCC production, spare capacity would drop to 1.0 to 1.5 million bpd, historically very low levels, and well within the range where shocks or increased demand would dramatically increase the spot price.

This puts China in the position of a swing consumer: the only country able to quickly divert large purchases between the GCC and Iran's discounted surplus to even out the spot price. If the spot price does become volatile, China will have to play its hand with considerable finesse.

Chinese purchasers would have to finely judge market supply and demand, as GCC countries ramp up production, and calculate the impact of any release of strategic reserves. Meanwhile, Chinese leaders would be anxious to avoid accusations of profiteering.

Best guide: Best interest
Ultimately, the best guide to China's likely course is a correct appreciation of the country's own best interests. As a massive crude importer, China wants a cheap and reliable supply of oil. By threatening the Gulf of Hormuz, the Iranian regime has clearly shown it is a long-term threat to that interest.

So in the long term, Beijing would be sympathetic to Western sanctions, and try to ensure they inflict sufficiently agonizing pain in Tehran to achieve their objective.

At the same time, China would want to protect its companies' existing investments in Iran, so they retain pole position for the day Iran becomes "normal" again, and its oil industry cranks back into first-world gear. That means acting sympathetically towards Tehran, at least to the extent of not demonstrably knifing its government in the back.

As China steers this fine course, both Iran and the West can expect lots of pretexts for acts, or omissions, they find objectionable. But China's long-term interest is clear....?

By Phil Radford

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