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Feb 28, 2012, 03.12 PM IST | Source: Moneycontrol.com

Impact of Iran crisis on India: CARE Ratings

CARE Ratings has come out with its report on impact of Iran Crisis. The Iranian crisis and the impact on oil prices pose probably the biggest risk to global economic growth this year.

CARE Ratings has come out with its report on impact of Iran Crisis.

Iran has become the focus of attention for the global economy with wider ramifications of the political issue surrounding Iran`s nuclear capabilities snowballing into an economic crisis on account of oil-economics. The price of crude in international markets has already started pacing upwards to cross the $ 120 mark on fears of this crisis escalating to dangerous proportions.

The political view is that Iran`s claims of their nuclear forays being for peaceful purposes, is not believed by the rest of the global community. There is a prophecy of war in which case there would be severe dislocations in the oil economy. While a war can emanate from Israel which will be supported probably by the US and its allies, the stance of the Arab nations is unclear. While they are opposed to the Iranian bomb, as it would make their own states vulnerable, Israeli intervention will not be acceptable. This means that even nations like Saudi Arabia would be drawn not just into the nuclear war but into an oil war as well.

Economic sanctions: Presently the western world has imposed sanctions on Iran so that it does not have the financial strength to purchase nuclear material. USA imposed sanctions by targeting any institution that does business with Iran`s central bank.

The European Union has imposed an embargo on Iranian oil. The oil ban agreed by the European Union, which will be phased over a period of 4-6 months to reduce the impact on some of the weaker European economies, is the most significant toughening of sanctions to date. The EU is also to bring in restrictions on the Central Bank of Iran and to expand a range of other existing measures intended to constrain Iran's ability to do business abroad. Europe accounts for about 20% of Iran's oil exports. Greece is heavily dependent on Iran, from which it buys about one third of its oil. Italy and Spain each buy a little over 10% of their oil from Tehran. They will all now have to seek supplies elsewhere.

Impact on Iran: Oil exports account for around a half of the government`s revenue. The oil embargo is to take place fully not before July which will affect around 20-25% of Iran`s exports or roughly 600,000 barrels a day (BPD). European customers have already started looking elsewhere. Iran exported around 2.154 mn bpd of oil in 2010. China (20%) and India (16%) are the only nations that continue to buy oil from Iran. The US has to persuade South Korea and Japan to scale back their imports of Iranian crude. China, which buys over one- fifth of Iran's oil, is clearly the key and has sent conflicting signals. It appears to have significantly cut back on orders from Iran and sought to bolster its ties with other Gulf producers. Tehran is trying to sell an extra 500,000 barrels a day of oil, or nearly 23% of what it exported last year, to Chinese and Indian refiners. If it cannot find customers by mid-March for the oil, which is equal to the amount European refiners bought last year, Iran would be forced to put unsold barrels into floating storage in supertankers, or reduce output. Either measure could push oil prices higher.

Iran`s economy is shaky today and the Iranian rial has lost half its value since December. This is coupled with food shortages and slowing down of investments. Iran`s own exports are otherwise quite small relative to global requirements which have been projected by IEA to be about 90 mn bpd for 2012.

Present Oil Matrix: In January, non-OPEC supply was 53.2 mn bpd on lower global biofuels output, an escalation of conflict in Syria and between Sudan and South Sudan, and continuing outages in the North Sea. North American light tight oil production and NGLs, as well as increasing production in Latin America, offset declines elsewhere, supporting an expected 0.9 mn bpd rebound in non-OPEC supply in 2012. OPEC crude oil supply in January rose to 30.9 mn bpd on a steady ramp-up in Libyan production and sustained output from Saudi Arabia and the UAE. Suppliers like the Saudis, despite Iranian threats are willing to step up to cover the additional output required.

Saudi Arabia could increase production to around 11.8 mn bpd in a matter of days, or about 2 mn bpd greater than the current production estimate of 9.85 mn bpd. Angola, the UAE, Libya and Iraq are all expected to bring on new production capacity over the course of 2012, potentially as much as 850,000 bpd, while non-OPEC supply is expected to rebound to the tune of nearly 1 mn bpd in 2012.

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