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Wednesday, Dec. 21, 2011

U.S. efforts to cut off Iran's oil exports put Japan in tight spot

Tokyo, which imports 10% of its crude from Tehran, seeks waiver

Staff writer

The latest U.S. sanctions on Iran's oil exports have put Tokyo in a difficult position, with Japanese diplomats and companies scrambling to secure sufficient energy resources while avoiding penalties for continuing to do business with Tehran.

News photo
A passerby takes a photo of the U.S. Senate on Capitol Hill in Washington in July. UPI/KYODO

Under the U.S. legislation, which was recently passed by Congress and is awaiting President Barack Obama's signature, Washington will penalize any financial institution found to be conducting business with Iran's central bank, Tehran's conduit for its oil exports.

Iranian crude oil accounted for approximately 10 percent of Japan's total oil imports in fiscal 2010, and the government here is weighing how to end its oil trade with Tehran while maintaining the current level of supply.

Washington is ratcheting up the pressure on Iran due to its nuclear program, which Tehran claims is solely for generating civilian atomic power but which many in the West suspect is aimed at developing nuclear weapons.

On Friday, Foreign Minister Koichiro Genba was quick to hint that Japan will seek to be exempt from the latest U.S. sanctions.

"The Foreign Ministry has expressed concerns over the impact (the sanctions will have) on our country and the global economy," Genba told reporters.

Currently on a four-day visit to Washington, Genba on Monday raised the issue during a meeting with Secretary of State Hilary Rodham Clinton, saying that "Japan fears (halting imports of Iranian oil) will hurt the entire global economy."

Choking off Iran could send oil prices soaring, and Japan, which has become increasingly dependent on fossil fuels because of the Fukushima nuclear crisis, would be hit especially hard. In the face of mounting public concern over the safety of atomic energy, the government has been unwilling to restart reactors idled for regular inspections. As of Dec. 1, only nine of the nation's 54 reactors were in operation. All could potentially be offline by spring.

"Obviously, we must also address the impact it will have on oil prices and the economy," Genba said.

Japanese Bankers Association Chairman Katsunori Nagayasu also expressed concern over the impact of ending oil imports from Iran or penalizing bank institutions for doing business with Tehran.

"Bringing everything to a halt will inevitably have a negative impact on Japan's economy," Nagayasu said Friday. "We hope the government will negotiate an exemption that would allow (financial institutions) to continue transactions with Iran."

So far, Washington has appeared willing to respond to Tokyo's request with a degree of flexibility.

On Thursday, a spokesperson for the State Department said Washington will "maximize the pressure on the government of Iran" but will also protect "the legitimate interests of America's friends and allies around the world."

Given Washington's determination to tighten the screws on Iran, however, it seems unlikely it will grant Tokyo a complete exemption, forcing the government to secure alternative — and potentially more expensive — crude oil from other countries.

According to the International Energy Agency, Iran possesses the third-largest oil reserves in the world and produces approximately 360 million barrels a day. Japan, China and European nations are the biggest importers of Tehran's crude oil, but the new U.S. restrictions would also influence countries such as India and South Korea.

Some analysts say that once Obama signs the bill, there will be a rush to secure supplies from other oil-producing countries, creating instability and price volatility in the oil sector.

A few experts have even forecast that the U.S. sanctions could push up the price of crude oil to around $200 per barrel.

But others say it is too early to forecast exactly how the new U.S. curbs will influence the market.

"If exports from Iran come to a halt, it is a pretty big deal since the country produces approximately 12 percent" of crude oil among member states of the Organization of the Petroleum Exporting Countries, Jun Inoue, a senior economist at Mizuho Research Institute, told The Japan Times.

That could lead to a worst-case scenario in which oil prices surge and send the global economy, already under a cloud due to Europe's debt crisis and the lack of growth in the U.S., into a full-blown tailspin, Inoue said.

But under an alternative scenario, a global recession would result in demand for oil dropping and averting large price hikes, Inoue said.

Even if Iranian oil supplies are choked off, other exporters in the gulf region, including Saudi Arabia, Kuwait and the United Arab Emirates, are expected to be able to cover the supply shortfall, so a sudden oil shortage is unlikely, he said.

Taking these factors into account, the risk of oil prices soaring is not considered to be that high, though the situation still has to be closely monitored, Inoue said.

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