The Obama administration will exempt a group of European countries and Japan from sanctions, because they have significantly curtailed their oil imports from Iran. Remaining on the list are India and China, Tehran’s top two petroleum importers.
That leaves Indian and Chinese banks vulnerable to being cut off from doing business with the United States.
Under a US law enacted last year, countries have until June 28 to reduce the volume of their crude oil imports from Iran or risk sanctions. The law enjoyed strong congressional support when it was signed, however, it offers the administration some wiggle room to protect American allies. Sanctions are imposed only when the American president believes nations are not doing enough to reduce their dependency on Iranian-produced petroleum when alternative sources are present.
Secretary of State Hillary Clinton, who announced the list with the exemptions Tuesday, praised the 10 European countries plus Japan for the decision to proceed with the cuts at a time when their economies are struggling and harsh austerity measures are being imposed on some members of the European Union.
"The actions taken by these countries were not easy," Ms. Clinton said. "We commend these countries for their actions and urge other nations that import oil from Iran to follow their example."
As international concerns mount over Tehran’s nuclear program, US financial sanctions along with Europe’s oil embargo aim to pressure Iran by depriving the Islamist regime of vital revenues so that it will halt uranium-enrichment activities. Crude oil and its derivatives make up about 80 percent of Iran’s total exports and fund roughly half of the government's budget.
The US decision means that Japan and the cluster of EU countries, which jointly account for 32 percent of Iran’s oil exports according to the US Energy Information Administration, may still purchase some Iranian oil without their banks facing financial sanctions.
Japan, a close US ally, welcomed the American move to exempt the country from any type of economic retaliation and promised even further cuts.
"We have told the US side that the trend of decrease would accelerate and Iranian crude imports will be reduced substantially from now on," said Chief Cabinet Secretary Osamu Fujimura.
Japan had already reduced its crude imports from Tehran by 15 to 22 percent in the second half of 2011, while the Asian nation’s major oil firms promised to comply with the agreement between the government and the US.
Although India publicly rejects imposing sanctions to Tehran, it is reportedly pressing its oil refiners behind the scenes to implement significant cuts in imports from the Islamic state. The government is said to be looking for 15 percent cuts while working to safeguard lost supplies through fellow OPEC members Saudi Arabia and Iraq.
Meanwhile China, top buyer of Iranian crude with a 20 percent share, has temporarily slashed imports by 290,000 barrels a day due to a payment dispute. Still, experts estimate it is unlikely to keep such cuts for a prolonged period because the dispute is already resolved.
Chinese petroleum imports “may rebound in the following months but are unlikely to reach average levels purchased last year,” Gong Jinshuang, of the China National Petroleum Corp., told Bloomberg News. “Chinese refiners need to consider the political risk.”
Furthermore, China has already increased imports from Saudi Arabia, the world’s biggest oil producer and the sole energy provider capable of redressing energy market disruptions. In February, it boosted its Saudi imports by 260,000 barrels a day.
As political tensions rise and an Israeli military strike against Iranian nuclear facilities looms, the viability of the sanctions seems to be connected to the degree of Saudi willingness and ability to make up for the growing Iranian deficit.
"My only mission is to convey to you that there is no supply shortage in the market," said Saudi oil minister Ali al-Naimi Tuesday. "We are ready and willing to put more oil on the market, but you need a buyer."
US crude futures prices fell $2.48 Tuesday to $105.61 per barrel, the biggest drop in more than three months following Mr. al-Naimi's statement. On Wednesday, oil recovered most of that loss, closing at $107.64, but by late morning Thursday it was trading down again below $105. Some analysts are skeptical that Saudi Arabia has the spare production capacity to handle a severe disruption in the oil market.
[Reuters material was used in this report.]