Michael Lynch: Oil Smuggling (Or Not) From Iran: Some Numbers

Oil Smuggling (Or Not) From Iran: Some Numbers
Michael Lynch Jan 10, 2020https://www.forbes.com/sites/michaellynch/2020/01/10/oil-smuggling-or-no...

Iranian oil exports have plummeted due to U.S. sanctions, said to have reached roughly 300,000 barrels per day. Most of this is probably going to oil trading companies, rather than refiners, and is being shipped out on Iranian tankers. These evade scrutiny (partially) by transferring oil to other ships and/or having their tankers turn off their radio identification equipment. But in theory, the amount shipped could increase quite a bit, especially if the Iraqi government helps.

Unlike the pre-1973 era, when most oil was moved by a few major international oil companies, there is now a plethora of trading firms that can handle the oil, and disguise its origin. During earlier sanctions, billionaire trader Marc Rich was accused of buying oil from Iran during Ayatollah Khomeini’s rule and in a recent case, the U.S. imposed sanctions on a Chinese oil trading firm. While nations like Japan and S. Korea have ceased imports of Iranian oil, other customers such as China, India, and Turkey are more likely to be lax about accepting re-labeled Iranian oil, or even encourage its purchase.

Lessons of history are often illuminating, but sometimes misinform us. For analysts of a certain age, the first anti-exporter oil embargo was 1951, when BP went to various courts after the nationalization of its Iranian holdings to seize cargoes that the country was trying to export on the grounds that its concession meant that it owned the Iranian oil. It was successful in blocking most exports and the Iranian government fell (or was pushed).

Later, when Iraq decided to nationalize foreign operators’ holdings, it came up with a strategy to prevent such a move: it sold oil to the Soviet Union, whose ships were not subject to most courts. And since that was shortly before the 1973 oil crisis, many importing governments had no desire to antagonize a major producer.

Generally speaking, economic embargoes have tended to fail unless the embargoed nation was weak, the embargoing nation strong, and the demands relatively insignificant. (See the 1990 book Economic Sanctions Reconsidered by Hufbauer and Schott.) Sanctions against Saddam Hussein worked fairly well because they were instigated by the United Nations and enforced by various navies.

More recently, the unilateral sanctions by the U.S. have reduced Iranian oil exports to minimal levels because the U.S. has threatened to use its control over international financial transactions to punish entities that do not comply. (The British seized an Iranian tanker recently, but only because it was heading for Syria, which is under U.N. sanctions.)

Recently, it was estimated that Iran is exporting about 300,000 bpd, far below the 2.5 million bpd before the most recent sanctions. That amount requires roughly one supertanker a week, which sounds trivial but it’s hard to disguise something that is roughly 4 football fields (soccer fields, if you are American) long. On the other hand, smuggling is an age-old activity: even the Iranians have been plagued by it, as smugglers buy up heavily discounted petroleum products and ship them across the Gulf for resale at world prices.

But the point is that the type of ship used for small-scale smuggling in the Gulf carries about 1,500 barrels, while a tanker truck for cross-border transit carries 120 barrels and the minivans smugglers use can only hold 12 barrels. (Data taken from various sources on the internet; I have not hacked into Iranian computers.) In other words, to smuggle 1 mb/d would require about 700 small ships, 8000 tanker trucks, or 84,000 minivans.

Those numbers sound absurd, but the point is that the Iranians are not going to export 1 million bpd by minivans. However, these methods could supplement other approaches, and provide not insignificant revenue. For example, since they were selling an estimated 5,000 to 10,000 bpd with tanker trucks to Western Syria, those same trucks, if used on the short-haul routes from the oil producing areas to southern Iraq, could accommodate as much as 200,000 bpd.

More importantly, the Iranian oil fields are in close proximity to the Iraqi oil terminals at Fao, near Basra, and the easiest thing to do would be to run a short pipeline to the Iraqi system. (Some oil could move by barges to the Iraqi facilities and be blended with Iraqi crude.) A pipeline carrying 1.25 million bpd through Iraq to the Syrian port of Banias had been proposed, but the Iraqis feared angering the United States, which would obviously oppose such a development.

Now, the Iraqi government will probably be much more amenable to assisting the Iranians evade U.S. sanctions, whether by trucking and barging small amounts for re-labelling as Iraqi crude or allowing them to connect pipelines to the Iraqi system. Theoretically, the U.S. might try to seize tankers leaving Iraq and testing the chemistry of the oil to try to identify its origin, but this would be of dubious legality.

Without a naval cordon, it would be difficult to completely stop Iranian oil exports, and the current levels are likely to represent the lowest levels, as the Iranian government and its customers work out ways to evade financial oversight and sanctions. More seriously, an Iraqi government that distances itself from the United States could greatly facilitate Iranian exports.