ANALYSIS: New Iran sanctions could lead to higher oil price

By Albert Otti Nov 22, 2011, 16:44 GMT

Vienna - New sanctions by the United States, Britain and Canada that target Iran could drive down oil production in the country and push up oil prices in the long run, analysts said Tuesday.

Governments in Washington and Ontario announced Monday they would prohibit the sale of necessary equipment to Iran's energy sector.

The two governments also joined London in cutting ties with Iranian banks.

The trio's move came as a reaction to a new report by the International Atomic Energy Agency (IAEA).

IAEA said it has collected credible information indicating 'that Iran has carried out activities relevant to the development of a nuclear explosive device.'

The punitive measures will not affect production at existing oil wells in Iran, an analyst at Commerzbank in Germany, Carsten Fritsch, told dpa.

However, oil might trade at higher levels nevertheless, Fritsch added.

'There is an effect, because a certain risk premium is warranted,' Fritsch explained.

An escalation of the standoff over Iran's atomic programme could lead to spikes in the price of oil.

Iran is the second-biggest producer of the Vienna-based Organization of the Petroleum Exporting Countries (OPEC).

The sanctions also ban supplies to Iran's petrochemical industry, which exported 8-billion-dollars worth of products last year, according to Ehsan Ul-Haq, an expert with the British energy consultancy KBC.

In addition, the financial sanctions could make trade with oil and petroleum products even more difficult for the countrym which has already been affected by previous sanctions, he said.

This might lead to less oil production in Iran and higher prices globally.

'At the moment, there is enough oil' to supply global markets, Ul-Haq said. 'But if demand rises, there could be a problem.'

Fritsch added that it might become difficult to finance new oil fields and to invest in Iran's energy sector if ties to the country's banks are cut. However, China might chose to step in and make up for missing Western funds, he added.

The European Union is planning to tighten its sanctions against the OPEC member on December 1, diplomats in Brussels said Tuesday.

France on Monday proposed that the US, Canada, Japan, the EU and other willing countries should stop importing Iranian oil.

Europe's benchmark oil brand Brent traded at 108.63 dollars per barrel (159 litres) Tuesday afternoon, up 1.75 dollars from the previous day.

Iran exported 2.6 million barrels per day (bpd) in 2010.

Of that number, 878,000 bpd went to Europe; nearly double that amount was shipped to Asia.

However, only 2 per cent of Europe's oil imports were Iranian derived, said Claudia Kemfert of the German Institute for Economic Research in Berlin.

'These volumes could easily be compensated with higher amounts from countries like Russia,' she said.

Besides such measures, several Western countries and Israel have said that the option of a military strike is still on the table, even if they prefer to solve the nuclear feud through multilateral negotiations.

'There is always the danger that this escalates,' Fritsch said. Iran could retaliate and block the straight of Hormuz, a shipping route for 15.5 million barrels of oil from various countries per day, he added.