IEEJ: February 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (71)

December 20, 2011

U.S. to Toughen Sanctions on Iran under Defense Authorization ActKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 15, the U.S. Senate voted 86 to 13 in favor of the National Defense
Authorization Act for Fiscal Year 2012 for tougher anti-Iran economic sanctions including aneffective oil export embargo on Iran. The bill passed the House of Representatives by anoverwhelming majority on the previous day. It will be signed into law by President Barack Obama.
Behind the tougher anti-Iran economic sanctions, Iran’s tensions with the international
community, including the United States, over Iran’s nuclear weapons development have grown sinceNovember. A turning point came on November 8 when the International Atomic Energy Agency
issued a report indicating “evidence” of Iran’s nuclear weapons development. On November 21, theUnited States, Britain and Canada came up with their respective additional economic sanctions onIran. On December 1, the European Union made its decision on anti-Iran sanctions. In Iran,demonstrations against Britain's tougher sanctions developed into a riot, leading to an attack on theBritish embassy in Tehran on November 29. Iran's tensions with the United States and Europe have
escalated fast over the tougher economic sanctions. The U.S. Congress's approval of the tougheranti-Iran sanctions indicated the United States' very tough stance against Iran.
What are key points of the anti-Iran sanctions in the defense authorization act? They
include a measure to prohibit foreign banks from settling transactions in U.S. dollars with their U.S.
counterparts if they deal with the Central Bank of Iran (CBI) and other Iranian financial institutions.
Foreign banks that must maintain dollar-based settlements in the United States may have toterminate deals with the CBI and other Iranian banks in order to avoid the prohibition. The problem
is that the measure could lead to an effective embargo on Iranian oil exports. As Japanese banks
settle crude oil imports at the CBI, their settlement of crude oil imports at the CBI may conflict withthe U.S. law and their dollar-based settlements in the United States may be prohibited. Then, they
may have to avoid oil transactions with Iran in order to continue dollar-based settlements in theUnited States.
At present, President Obama has yet to sign the bill into law. Given the current conditions,however, he is expected to sign the bill for its enactment in the near future. Then, the following steps
may have to be taken with certain conditions met before the law actually brings about the stringent
Iranian oil embargo. The future focus of attention would be whether these conditions could actuallybe met.
Within 60 days after the act's enactment and every 60 days later, the Administrator of theEnergy Information Administration together with the Treasury Secretary, Secretary of State and1

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the Director of National Intelligence, will report to Congress on prices and other conditions ofoil supply from other countries than Iran.
Within 90 days after the act's enactment and every 180 days later, the president, based on theabove mentioned reports, shall decide whether oil supply from other countries than Iran would
be sufficient.

If the president decides that such oil supply is sufficient, the prohibition shall be imposed on
foreign banks that will have settled oil transactions with Iran in U.S. dollars 180 or more days
after the act's enactment, with the following exceptions.

The sanction will not be imposed on banks from foreign countries that will have substantiallyreduced oil imports from Iran in the period toward the presidential decision (exemption).

The president may waive the imposition of sanctions for up to 120 days (and may renew thewaiver) if the waiver is identified as vitally significant for U.S. national security.

In this way, developments regarding the oil market, crude oil purchases from Iran and U.S. national
security will become decisive factors behind the run-up to the actual embargo on Iranian oil exports.
Nevertheless, the U.S. steps can effectively impose a stringent embargo on Iranian oilexports. While future developments cannot be predicted, we can expect that the Iranian oil embargo,
if implemented, would have a substantial impact. This is because Iran is the world’s fourth largest
crude oil exporter, with its exports totaling 2.24 million barrels per day in 2010. The impact may
depend on various combinations of embargo measures including embargo scales and exemptions. Inthe worst case where Iranian crude oil is lost in the international oil market under a complete
embargo, it would be difficult to cover the loss. Even Saudi Arabia with the world’s largest surplus
oil production capacity may have physical difficulties covering such large loss and be forced to makea very difficult political decision in the face of an actual Iranian oil embargo. If Saudi Arabia
expands oil output substantially to cover the loss of Iranian crude oil exports, the global surplus oil
production capacity may fall substantially to sharply increase the sense of a tightening
supply-demand balance in the international oil market.
Since Asian countries including Japan are major importers of Iranian crude oil, thesupply-demand balance is expected to tighten particularly in the Asian market. Crude oil imports in2010 totaled 430,000 bpd for China, 360,000 bpd for Japan, 290,000 bpd for India and 200,000 bpd
for South Korea. The four Asian countries absorb about 60% of Iran’s oil exports. The Iranian oilembargo is a serious issue for Japan and South Korea that give priority to their respective bilateralrelationship with the United States. While the urgent challenge for the two countries is theircoordination with the United States, they may have to pay attention to what actions China and India
will take. I am interested in how China and India would respond to the Iranian oil embargo issue andhow their crude oil imports from Iran would change. If an actual Iranian oil embargo tightens theglobal oil supply-demand balance and destabilizes the international oil market, we may have to pay
attention to the two emerging oil importers’ market actions as a factor that could accelerate themarket destabilization. In the event of oil supply shortages and market destabilization, theInternational Energy Agency may implement internationally coordinated market stabilization
measures. Then, wide international cooperation and collaboration including China and India may
grow more important.
The Iranian oil embargo issue also entails Iran’s possible countermeasures, its growing
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political and military tensions with neighboring countries over nuclear arms development, and otherproblems that we cannot ignore. Developments regarding the Iranian oil embargo issue could affectnot only Iranian oil exports but also the Persian Gulf situation and the security of oil and gas exports
from the region. We see uncertainties in U.S. domestic arguments over the issue, various
considerations regarding the U.S. presidential election, Iran’s responses, the attitudes of Iranian oil
importers subject to the U.S. sanctions, and moves of other Arab oil exporting countries and Israel.
Therefore, the fate of the Iranian oil embargo issue may become one of the largest factors affecting
the international oil and energy situation in and after 2012.

Contact: report@tky.ieej.or.jp
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