Iranian oil poses Asian dilemma
By Sreeram Chaulia
Jan 25, 2012
The European Union’s announcement of a ban on importing Iranian oil has unleashed an economic war that is bound to draw in Asia’s booming economies in spite of their reluctance to take sides and enter into the muddle.
The six-day sojourn through oil and gas-rich Arab countries in the past week by China’s Prime Minister Wen Jiabao was clearly organized in this context of rising tensions over fresh Western sanctions against Iran and its consequences for energy security in Asia.
On Monday, EU foreign ministers decided to close off Iran’s second-biggest market for crude oil, responsible for a fifth of oil exports over Iran’s nuclear program, suspected in some quarters – and denied by Iran – of being designed to create nuclear weapons.
The EU and the United States are pushing major importers of Iranian oil such as China, Japan, South Korea, India and Turkey to join the economic embargo. Although China has rebuffed Western entreaties to reduce oil imports from Iran, the choice of Saudi Arabia, the United Arab Emirates and Qatar as the only destinations in Wen’s Middle East itinerary told a tale of precautionary diplomacy.
These three Arab states are pro-Western, Sunni Arab suppliers of oil and gas to Asia’s growth engines, and they are assaying the roles of Western accomplices in the economic war by presenting themselves as substitutes to energy products that Iran has been providing.
While China publicly plays down talk of forsaking Iranian oil and replacing it with Arab alternatives, Wen repeatedly raised the prospect of drastically increasing energy imports from the anti-Iranian Arab regimes he just visited.
Chinese communiques during Wen’s Middle East tour cited “complicated regional trends” and shaky energy horizons due to “geopolitical factors”, codes for the growing chorus in the West to compel Iran on its suspected nuclear weapons development.
Counter-threats from Tehran to shut down the Strait of Hormuz, through which much of Asia’s oil imports flow, and the ever-present danger that Israel might unilaterally attack Iran, have creased brows in Beijing as they coincide with China’s slowing economic growth.
Yet, China is confident that its size and economic leverage over the US are such that ignoring Washington on embargoing Iranian oil would not incur real damage.
When one Chinese oil firm, Zuhai Zhenrong, was recently placed on the financial sanctions list for trading with Iran, Beijing reacted furiously and conveyed “strong dissatisfaction and adamant opposition”. There is no automatic trigger for closing American financial markets to all foreign companies that trade in Iranian oil, and this discretionary element in the sanctions architecture gives China and other Asian powers scope to wiggle out of the proposed embargo.
Moreover, none of the Asian states are certain that the embargo on Iran will be long-lasting, given that anti-Iranian Arab petro-kingdoms cannot fill in the supply gap beyond more than one month. Barring a sudden fall of the Iranian regime, the embargo’s success through universal participation would only mean a huge spike in the price of crude oil and a big setback to the industrial machines of Asia.
Economic recessions have frequently followed “oil shocks” and the embargo on Iran could usher one more cycle of downturns.
Despite their strategic closeness to the US, countries like India, Japan, South Korea and Turkey are equally wary of costly economic fallout from sanctions and war in the Persian Gulf. New Delhi has decided not to heed the West on abandoning Iranian oil imports, and it is proceeding to negotiate alternative payment processing mechanisms to continue trading with Tehran.
But since India is not in a position to prevent a violent conflagration involving Israel and Iran, it is being reported that India’s Petroleum Ministry has instructed its public sector oil refining companies to “reduce their dependence on crude imports from that country [Iran]“.
As with other Asian importers of Iranian oil who are on tenterhooks because of the cold war between Iran and the West, India will eventually have to diversify away from (though not totally renounce) a politically unstable oil exporter like Iran and the supply chain originating from the Middle East as a whole.
With international sea freight rates declining steadily, India can think of entering into long-term contracts to raise oil imports from geographically more distant but predictable countries such as Venezuela, Brazil and Angola. Currently, India depends on the volatile Middle East for 70% of its oil and gas imports, an unhealthy addiction laden with grave international political risks.
While seeking to gradually free itself from Iranian and other Arab energy producers, India and other Asian powers must also factor in the larger structural implications – for the Middle East as a region – of deserting Iran at a time when the US and the EU are aiming at Tehran’s jugular.
If the Iranian regime falls to a mix of economic woes and US-Israeli sanctions or war, it could leave the Middle East bereft of any counterbalancing force to the West. Democracy in Iran through popular internal mass mobilization is more preferable as the new regime that emerges is unlikely to be a stooge of the West.
It is in the interests of Asian powers to avert a Middle East entirely under the Western thumb simply because India and its continental peers profess a desire for a multipolar world where there is no single global hegemon. It makes tactical sense to slowly retrench from Iranian oil, but it would be a strategic disaster for Asian powers to become reliant on Western approval to access Middle Eastern energy, which will remain important in Asia’s energy mix for at least some more years.
This geopolitical balance-of-power imperative is often lost in Indian strategic thought, which is prone to calculating more narrowly about the benefits and losses from a supply disruption in oil or inflation of barrel rates for crude.
China and Russia have the grand strategy of resisting Western hegemony in the Middle East, and they try through various developments, such as the imbroglio over democracy in Syria, to deny the onset of West-friendly regimes in that region.
Indian lenses are less global and New Delhi does not see itself as a counter-balancer to maintain multi-polarity on a global scale. There is also an implicit consensus in India that its only balance-of-power concern lies vis-a-vis China and that being seen openly as entering into a troika with Russia and China on issues in the Middle East would hurt India’s chances to assert its claim to be even-steven with China.
But the current standoff over embargoing Iran, which supplies 11% of India’s oil needs, is so vital to New Delhi’s national interests that it begs for more proactive diplomacy on the question of hegemony in the Middle East.
Unlike China, which has a first-mover advantage, India is also realizing the value of Africa and Latin America as stable sources of energy and trade rather late.
The economic war via Iran’s oil embargo should be a wakeup call to redouble Indian diplomacy and foreign investment in these two hitherto neglected continents, while not passively turning one’s back on the still pivotal Middle East.
Playing it safe and seeking more assured oil supplies is an evolutionary process for Asian powers. The interregnum period, until they tether their economies firmly to Africa and Latin America, will require joint positioning for maintaining a power balance in the Middle East.
Sreeram Chaulia is Professor and Vice Dean of the Jindal School of International Affairs in Sonipat, India, and the first B Raman Fellow for Geopolitical Analysis at the strategic affairs think-tank, The Takshashila Institution. He is author of the recently released International Organizations and Civilian Protection: Power, Ideas and Humanitarian Aid in Conflict Zones.