Black-Market Gas Shelters Iran

Proposed U.S. sanctions aimed at starving Iran of foreign gasoline could be signed into law before the end of June, but a shadowy network of Middle East gasoline suppliers is already undermining U.S. efforts to pile pressure on Tehran.

Oil traders and oil industry analysts say Iran will have little trouble finding other gasoline supplies in the Persian Gulf, where a black market in fuel-products thrives, even if Washington passes measures that would penalize firms or individuals with business in the U.S. that supply gasoline to Iran.

Capt. Mousa Murad, general manager of the United Arab Emirates’ Port of Fujairah, says gasoline sanctions will likely give a lift to a thriving black-market fuel trade in the Gulf. The region has no shortage of suppliers, he says, who will continue to hide gasoline shipments to Iran because “prices will go up two times, three times.”

Despite having the world’s third-largest proven crude-oil reserves, Iran is forced to import around one-third of its gasoline requirements, at a cost of billions of dollars a year, because it has insufficient refining capacity.

Iran already buys some gasoline on the black market from a web of small firms that have no U.S. business ties, according to people familiar with the trade.

“Some of these entities exist for a very short period of time and then close down,” says an intelligence official from a Gulf state. “They might help other companies disguise cargos by taking delivery of gasoline from one party and then charter an Iranian oil tanker to send the gasoline to an Iranian port.”

Some analysts also say the proposed U.S. legislation could even help the Iranian government wean itself off costly subsidies for imported gasoline, which it has been trying to do for years to relieve fiscal pressures.

Sanctions would allow Tehran to blame outsiders for cuts. “Sanctions will do for Iran a favor the Iranian government can’t do itself,” says Fereidun Fesharaki, an Iranian oil specialist at FACTS Global Energy, a consultancy which sells data on Iran’s energy sector to the U.S. government.

Some sanction supporters say moves to further reduce energy subsidies could turn the Iranian people against their government.

The proposed U.S. legislation, following on fresh sanctions passed last week by the United Nations Security Council, is part of a wider strategy to pressure Iran not to build nuclear weapons, which the country denies it is doing.

“We are using every tool in our toolbox to change and tighten the screws of the regime and refined petroleum is one of many,” said a senior Obama administration official.

The House and Senate have each passed legislation intended to curb gasoline sales to Iran, and prospects for passage of final terms are good, say legislators and Obama administration officials.

A final U.S. bill is expected to be sent to President Barack Obama this month, although it is unclear if the president will sign what is sent to him or demand changes. The administration has been trying to convince Congress to give the president the right to exempt from sanctions countries or companies that demonstrate support for international efforts to constrain Iran’s nuclear ambitions.

“We have been working with leaders on the Hill on this legislation for weeks, and look forward to seeing the final bill,” said White House spokesman Tommy Vietor.

Representatives of the House and Senate committees handling the legislation didn’t respond to requests to comment.

The proposed legislation has drawn criticism from some American businesses that fear that U.S. companies will have to cut ties to foreign businesses that trade with Iran’s energy sector.

“We’re not trying to stop this bill,” says Christopher Wenk, a senior director of international policy at the U.S. Chamber of Commerce. But, he adds, “the collateral damage could be enormous” if changes aren’t made.

Mark Dubowitz, head of the Iran Energy Project at the Washington-based Foundation for Defense of Democracies, says the proposed sanctions could drive up the cost of gasoline and aggravate Iran’s 15%-20% inflation rate. That likely would cause political problems for the Iranian government, he says.

The European Union also is drawing up new measures that go beyond U.N. sanctions, which were watered down to win the approval of Russia and China. Proposed EU sanctions don’t, however, specifically target Iran’s gasoline imports.

But the threat of U.S. gasoline sanctions on the Islamic Republic has prompted some well-known oil companies and traders to halt their gasoline sales to Iran in recent months. They include BP PLC, Royal Dutch Shell PLC, Reliance Industries Ltd., Vitol Group, Trafigura and Glencore International AG.

Oil traders and industry observers say gasoline from some of these same firms is still finding its way to Iran through third parties, which purchase the refined product and then resell it to Iran.

The companies either declined to comment or said they weren’t aware of these transactions.

France’s Total SA is currently one of Iran’s biggest gasoline suppliers, according to traders and experts like Mr. Dubowitz. Total declined to comment about the proposed U.S. measures