Should America squeeze its own companies to squeeze Iran?

Even if it can be done, forcing foreign oil firms to not sell gasoline to Iran will hurt the US economy

Writing in the Wall Street Journal, Orde F Kittrie argues that the incoming Obama administration must exploit Iran’s “economic Achilles’ heel”—the fact that it has to import refined gasoline—to persuade it to negotiate over its nuclear programme. Since Iran imports gasoline from five firms “four of them European: the Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries”, he calls upon the Obama administration to insist that the Swiss, Dutch, French, British and Indian governments stop gasoline sales to Iran from their countries’ companies. (linkthanks Harsh Gupta)

In addition, he suggests that the US could act on its own:

Consider India’s Reliance Industries which, according to International Oil Daily, “reemerged as a major supplier of gasoline to Iran” in July after taking a break for several months. It “delivered three cargoes of gasoline totaling around 100,000 tons to Iran’s Mideast Gulf port of Bandar Abbas from its giant Jamnagar refinery in India’s western province of Gujarat.” Reliance reportedly “entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery.” One hundred thousand tons represents some 10% of Iran’s total monthly gasoline needs.

The Jamnagar refinery is heavily supported by U.S. taxpayer dollars. In May 2007, the U.S. Export-Import Bank, a government agency that assists in financing the export of U.S. goods and services, announced a $500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, 2008, Ex-Im announced a new $400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery. [WSJ]

It is unclear if Mr Kittrie is proposing that the US government purchase all that gasoline from Reliance at a premium over market prices, so as to deny the Iranians that gasoline. As for financing arrangements by the US Export-Import bank, what Mr Kittrie does not realise or forgets to mention, is that they exist because Reliance is purchasing goods and services from US suppliers. Withholding loan guarantees will be counterproductive to US commercial interests—for European and Japanese suppliers will be too keen to replace their American competitors, and their respective Ex-Im banks will supply the requisite loan guarantees. In any case, Reliance is unlikely to have too much of a difficulty in securing such guarantees, even in today’s financial markets.

Whatever the merits of the proposal to squeeze Iran through a policy of gasoline denial, Mr Kittrie’s proposal will hurt the US economy. Now, why would Mr Obama want to do that…when the US economy is already in the doldrums?

7 thoughts on “Should America squeeze its own companies to squeeze Iran?”

  1. To be fair to Kittrie, I think he’s suggesting hold onto the loan guarantees because he believes Reliance may not be able to find any other takers in the current economy. Countries may be looking to protect their own companies than guaranteeing foreign ones. What surprised me more was that Iran seem to lack refineries despite oil being a crucial part of their system. I would have thought it made more sense to safeguard their interests, before going on the nuclear rhetoric. Or Kittrie may not have conveyed the full picture regarding Iran’s refinery dependency.

  2. Arby,

    Kittrie is right. Iran does not have refining capacity. That they are going into nuclear before tackling oil refining first tells you that their nuclear project is not entirely motivated by energy concerns.

    That apart: withdrawing loan guarantees at this time, when the Reliance plant is almost completed won’t really achieve much. If, as a result, Reliance delays purchases (and payments) to the US suppliers who sell it equipment and services, then the US economy suffers too. It’s worse if Reliance defaults on its payments.

    Loan guarantees mainly apply to the plant construction at Jamnagar. Selling refined gasoline is another matter. Withholding loan guarantees won’t stop Reliance from selling gasoline to anyone. To do that, someone has to purchase all the oil from Reliance (much like what old Mr Ambani did in the old days, when he purchased the entire output of a polyester plant that he didn’t own, in order to control the market)

  3. Granted. I felt that the loan guarantee bit was his weakest argument. After all, it is just a failsafe for non-payment, after all. It comes to relevance only if Reliance defaults their payment, which I doubt even in the current situation.

  4. Arby, most oil rich countries consider crude to be more valuable then refined products. None of the oil countries have significant refining capacity. Only recently Saudi started building refiners to capture that down stream value add too. Digging holes in the ground to pump crude doesn’t take much expertise. Refining, on the other hand, is capital intensive and an extreme engineering challenge. West hasn’t built refiners either for decades because environmentalists won’t allow new permits to be given. They keep expanding existing ones. Only India has created significant refining capacity in the past few decades and Reliance is the global leader.

    Nitin, it’s not about one time funding. And if Reliance could access other funds, why did it go to US ex-im bank in the first place? Because it’s cheap money (although I am sure it’s not entire funding). I really doubt in this crisis prone financial markets, Reliance can access cheap capital from anywhere. And what of the future?

    Also, it’s not about the foreign policy of Mukesh Ambani. It’s really about what would Bharat do? I am dubious Obama would go down that route. He is more likely to follow the European lead. Talk…talk, even as their companies make deals with Iran on the site. And probably follow the N. Korean model of full relationship with Iran for abandoning nuclear option. Remember Albright/Clinton tried that in his last year. But things changed quite a bit since.

    Finally, isn’t that what economic sanctions are? Foregoing your own economic benefits while, apparently, punishing the other party. And it’s being going on since late 70s.

  5. Nitin,

    It is common knowledge that whenever the US imposes sanctions on another country, some US companies take a hit.

    But then the rationale in this case seems to be: “It hurts you much more than it hurts me”. If you put this together with the credit crunch globally, it makes sense to stop cheap loans to these refining companies from US-controlled entities.

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