The Oil and the Glory

What Canada’s ills tell us about Iranian smugglers

The history of sanctions and smuggling suggests that China and India will be big winners from oil sanctions slapped on Iran — among just a few remaining large buyers of Iranian crude, they will enjoy immense bargaining leverage with Tehran, and pay far lower than the global crude oil price. But how much will that ...

AFP/Getty Images
AFP/Getty Images

The history of sanctions and smuggling suggests that China and India will be big winners from oil sanctions slapped on Iran — among just a few remaining large buyers of Iranian crude, they will enjoy immense bargaining leverage with Tehran, and pay far lower than the global crude oil price. But how much will that discount be?

If a crisis faced by Canada is any clue, Iran’s crude oil revenues — $73 billion in 2010, accounting for most of the state budget — are going to plunge: In Canada’s case, a transportation bottleneck into the United States is forcing local producers to sell their crude at a 33 percent discount, the lowest price in some four years, write the Financial Times’ Gregory Meyer and Ed Crooks. Specifically, we are talking a price of about $67 a barrel, compared with nearly $100 a barrel for the U.S. traded blend, called West Texas Intermediate.

(Before you round up a bunch of friends with pickup trucks and head for Hardisty, you’d need to buy a considerable number of barrels to profit from this anomaly. But one would expect deep-pocketed entrepreneurs to be figuring out how to add tanker cars to the rail line.)

Sanctions and bottlenecks are different animals — the first can result in a seller’s inability to legally market his product most places in the world; the second is a purely technical hindrance. Yet in action, they can behave similarly, and — in the absence of hard data (at least that I have seen) on how much of a discount China, India, middlemen and smugglers are squeezing from Tehran (pictured above, Iranian President Mahmoud Ahmadinejad) — Canada’s suffering is instructive.

Last month, the Obama Administration rejected expansion of the Keystone Pipeline, which would have carried an additional 800,000 barrels a day of crude from Canada’s oil sands to Houston. But, while that decision (likely to be reversed after the U.S. presidential election, regardless who wins) contributes to an atmosphere of uncertainty — the nourishment of oil speculators — it is not the specific reason for the bottleneck: Even if the expansion had been approved, it would not come on line for at least another year.

Instead, the trouble is that there is already a glut of supply, and too few ways to get it to refineries. What you have is a combination of booming Canadian oil production — up by about 10 percent over the last year — that is bumping up against rising North Dakota crude. In all, western Canada and North Dakota are producing some 2.5 million barrels of oil a day, a volume that continues to grow.

For some months, experts have suggested that conventional land transportation — railroad cars, tanker trucks and alternative pipelines — would manage to pick up the slack. But they are wrong. Producers do not know what to do with their crude. There is "full storage in Alberta [and] maxed-out truck and barge," Deutsche Bank oil analyst Paul Sankey told clients in a note yesterday.

If you look at prices, the transportation trouble actually goes back to the beginning of December, when the Canadian blend went from selling at an $11-a-barrel discount to West Texas Intermediate to an approximately $37 discount this week.

The bottleneck has attacked not only the select Canadian crude, but caused a chain reaction and forced down the price even of West Texas Intermediate. Residential and industrial consumers will not weep. Neither will China and India. But Iranian leaders might.

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