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Petrol prices and the threat of US sanctions

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The threat of US sanctions if dependence on Iranian oil is not reduced hangs over India. In the age of oil price inelasticity, this is a clear inflationary problem. This article from IE can be read as an indication that a significant part of the solution could be political:

With the Goa government proposing a reduction in petrol prices by Rs 11, Minister of State for Parliamentary Affairs Rajiv Shukla today said the other states especially the BJP ruled ones should emulate the step to ease the burden on the common man.

“As far as petrol and diesel are concerned, states get more tax than the Centre from petroleum products. They impose more tax and get more. If states abolish taxes, then it will ease the burden on the common man,” he said.

Talking to reporters outside Parliament, he said long before Goa took the step, the Vilas Rao Deshmukh government in Maharashtra and the Andhra Pradesh government had initiated such a move.

“Central government had already reduced the custom duty…the share of the state govt is far bigger as far as money generated from petroleum products is concerned. State government should think over this (emulating Goa),” he said.

Shukla said the state government gets about 1.6 lakh crore as tax from petroleum products.

The Manohar Parrikar government had yesterday announced that only 0.1 percent value added tax (VAT) component would be levied by the state government during the presentation of the Budget.

Of course, party politics will never be separated from long term policy.

Written by Arhopala Bazaloides

March 28, 2012 at 3:35 am

Does India face sanctions?

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A statement by Hilary Clinton from the US Department of State

I am pleased to announce that an initial group of eleven countries has significantly reduced their volume of crude oil purchases from Iran — Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. As a result, I will report to the Congress that sanctions pursuant to Section 1245 of the National Defense Authorization Act for 2012 (NDAA) will not apply to the financial institutions based in these countries, for a renewable period of 180 days.

The Hindu reports of a direct consequence of this statement for India:

In its most direct message that India, along with other nations importing oil from Iran, could face sanctions by July if it did not “significantly” reduce such imports, the U.S. State Department warned in a conference call this week that if such countries, “in addition to having imported petroleum products, may have had other kinds of sanctionable activities, it could actually become liable to sanctions even before [June 28]”.

The remarks raised brows here as sanctions against countries such as India, China, and South Korea appeared more imminent following the White House’s push for upping the ante against Iran through its 2012 National Defence Authorisation Act (Section 1245).

A senior State Department official said on Tuesday the NDAA provisions gave nations 180 days from the start of this year to attain levels of oil import cuts similar to those of Japan, which was said to have decreased its imports of Iranian crude by between 15 and 22 per cent.

Starting February 29, the U.S. has put sanctions in place against any entity engaging in financial transactions with the Central Bank of Iran that were related to non-petroleum products “except in the circumstance of a country sending refined petroleum products to Iran.” Such entities have essentially been excluded from access to the U.S. banking system from the time this NDAA provision came into law.

Moneycontrol reports:

Indian oil buyers are asking Iran to bear the insurance risk for transporting its crude as tighter Western sanctions make it more difficult to buy Tehran’s principal export, industry sources said on Wednesday.

The number of maritime firms willing to transport Iranian crude has dwindled significantly since the European Union announced in January it would proceed with an oil embargo, leaving Asian oil buyers to rely more on Iranian-owned tankers.

With Indian shipping firms uncertain whether they can continue transporting Iranian oil, state-run Indian Oil Corp and Hindustan Petroleum Corp have written to the National Iran Oil Corp (NIOC) asking the company to take on the insurance risk for their crude shipments, two industry sources said.

NIOC has indicated it may consider the request on a case-by-case basis, the sources said.

Reuters breaks interesting news:

India, publicly disdainful of sanctions to pressure Iran, has been left off a list of nations given a U.S. waiver from the measures, but is privately pushing its refiners for substantial cuts in imports from the Middle Eastern country.

However, the 15 percent cut sources say India is privately demanding from state-run refiners could help it qualify for such an exemption. Reuters’ calculations show the overall cuts refiners are planning to make could be deeper at around 20 percent.

“It’s a sensitive matter,” said a government official who declined to be identified because he was not authorised to speak to the media. “You won’t get to know. To keep it secret we are sharing information and minutes of the key meetings over the phone instead of exchanging or sending letters.”

Written communication that was sent has been tightly guarded.

“The letters were being sent like those in the British Raj,” another government official said.

“Properly sealed with melted wax and in double envelopes as this is a very sensitive issue. Marked as ‘To be opened by addressee only.'”

Indian state refiners planning to cut the size of their term deals with Iran have sought additional supplies from the world’s top oil exporter, Saudi Arabia, and fellow OPEC member Iraq.

MRPL, India’s largest Iranian oil buyer, plans to cut its imports by as much as 44 percent to 80,000 barrels per day (bpd) for the fiscal year starting on April 1.

The Chinese newspaper People’s Daily wrote:

China legally imports oil from Iran through normal channels in a reasonable and fair manner, a Foreign Ministry spokesman said on Wednesday.

Spokesman Hong Lei said China imports oil based on its economic development needs without violating relevant resolutions of the UN Security Council and undermining the third party’s and international community’s interests.

“China opposes any country implementing unilateral sanctions on the other country according to its domestic law,” the spokesman said, adding that China will not accept the practice of saddling unilateral sanctions on the third country.

Nevertheless Oilprice.com suggests that China is playing it safe by stockpiling reserves:

One benefit of the six-month delay the West put on the ban has been giving the world time to adjust to a market with constrained Iranian supply. Reuters’ Clyde Russell calculated in a recent column that China’s oil inventories may be growing by 670,000 barrels per day. Similarly, OPEC’s own monthly oil market report suggested Chinese stock building may be as high as 800,000 bpd, explaining why Chinese oil imports have been soaring while the economy has been slowing and all pointers are suggesting oil imports should slow, if not fall.

A significant part of the largest trade deficit China has ever seen in January was due to a rising oil import bill; if China is indeed importing as much as 800,000 bpd for stock, one can understand Iran may be reading that as robust demand.

Meanwhile, US commercial oil stocks have hit record levels of 42 million barrels at Cushing, Ohio as falling demand (due to rising pump prices) and rising domestic production from less conventional sources combine to create something of a glut in the domestic market. Even this is dwarfed by America’s 700 million barrels of strategic reserve, some of which the president has apparently been discussing releasing with Britain’s Prime Minister David Cameron in talks this week designed to lower the oil price, although what effect this would have in the already well-supplied US market is less significant than if the extra supply was released in Europe or Asia.

The same article reported Iran’s belief that Saudi Arabia, touted by many as ready to ramp up production to meet any Iranian shortfall, is in fact already running close to capacity and unable to pump much more without damaging its long-term production efficiency. But a report in the FT states that although Saudi Arabia has been producing 9.8-10 million bpd, the highest level in 30 years, its domestic consumption plus exports are only 9.4-9.6 million bpd — the rest is said to be going into stock.

Apparently the Saudis own massive tank farms in the main European trading hub of Rotterdam, near its biggest Asian customers in Japan’s Okinawa, and in the Egyptian oil export port of Sidi Kerir. In total, Riyadh has permanent access to about 12 million barrels of storage, split among the three locations with further storage leased as required.

Turkey has to make a choice soon, a blog on FT says:

First, and perhaps most important, is a list that Turkey didn’t make it onto – the countries granted a temporary exemption from new unilateral US sanctions on imports of Iranian oil.

That’s significant, because Tehran supplied about half of all the crude Turkey imported in the first six months of last year and sanctions could spell big problems for Halkbank, the state-controlled bank that handles payments to Iran. (The US legislation targets financial institutions that facilitate such sales rather than the companies that do the buying.)

This is not to say that Turkey or Halkbank are the sanctions’ inevitable target. Hilary Clinton, US Secretary of State, pointedly remarked that 10 European Union countries and Japan, all of which she praised for reducing imports of crude from Iran, represented an “initial group” to be exempted from the measure.

But such a scenario just highlights that Turkey, like almost every other country in the world, sometimes has to yield under US pressure, even if such a course costs money. Iranian oil is not only relatively cheap but paid for with Turkish lira, rather than dollars or euros. So a switch to more expensive Saudi crude could do some damage to the national accounts.

Just like Turkey, India faces an economic crunch in the near future if it is forced to stop buying Iranian crude. Not only is Saudi crude going to be more expensive, with oil prices having turned inelastic, there is almost certainly going to be a rise in the price of crude (contrary to the claim in the article by Oilprice.com). With elections coming up and the manufacturing sector in the country already in deep trouble, the government will be forced to subsidize domestic oil prices, thereby raising deficits.

Written by Arhopala Bazaloides

March 22, 2012 at 4:03 am

A trade dispute made complicated

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On October 25, 2010 The EU required that euro-currency settlements with Iran be cleared per transaction. In compliance with this, the Reserve Bank of India (RBI) ruled on December 29 that dollar and euro payments to Iran could not be handled through the Asian Clearing Union (ACU) which was used for transactions between central banks, since the ultimate receiver of the payment could not be ascertained. The ruling seemed to have come without prior consulation with oil companies which import about 14% of India’s crude usage from Iran. A report in ET summarized the crisis.

Following this, BS reported:

The United States on Wednesday praised the Reserve Bank of India (RBI) for reducing its dealings with Iran’s central bank, saying the Islamic Republic misuses its financial relationships to support its nuclear programme.

“We think the Reserve Bank of India has made the right decision to carefully scrutinize and reduce its financial dealings with the Central Bank of Iran,” White House spokesman Tommy Vietor said in an email.

India denies US pressure, but Indian newspapers are not convinced. Trade negotiations started immediately, as the Hindu reported:

The public sector oil companies in India, the major importers of crude oil, have expressed concern at the RBI’s decision not to allow the Tehran-headquartered Asian Clearing Unit (ACU) to be used for making payments to Iran.

Petroleum Ministry officials said one of the options that emerged at a recent meeting in the Finance Ministry was that the Central Bank of the Islamic Republic of Iran would open an account with the RBI in India for the companies to make direct payments.

The other was that India could write to the European Union (EU), seeking exemption from the certification process required for imports from Iran. It is felt that at a later date, the ACU could recognise a currency other than the dollar and the Euro. An Indian delegation would soon visit Tehran to work out the modalities for payment.

The RBI said that the meeting between the two sides was a technical one to discuss modalities for future trade transactions, including in oil. Till October 2010, the transactions between the two countries were carried out in Euro through the ACU, which was set up in 1974. The clearinghouse settles trade transactions with Bangladesh, Bhutan, India, Iran, Nepal, Pakistan, the Maldives, Myanmar and Sri Lanka.

Iran made a bland statement, as Reuters reported:

Iran said an oil trade dispute with India had been settled by changing the currency for payments, deputy oil minister Ahmad Khaledi was quoted as saying by the semi-official Fars news agency on Friday.

“By changing the currency for oil transaction between Iran and India the problem was solved,” said Khaledi.

Indian

Written by Arhopala Bazaloides

January 2, 2011 at 5:09 am

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