Iran has put forward several conditions on its sale of oil to European Union countries. Most of them don't mean a damn as the Iranians seem ignorant of the most important point about oil: it is fungible.
The Iranian Government has issued a set of rules about who it will and won't sell oil to. They are aimed specifically at European Union countries, a response to those EU countries' upcoming sanctions on Iran about its mooted atom bomb making program.
The problem with the contractual rules that it is insisting upon is that they seem not to be aware that they won't have much effect given that oil is a fungible product.
"Iran has laid out conditions for future oil exports to other European countries after halting sales to Britain and France earlier this week, the Iranian Foreign Ministry spokesman said Tuesday."
The actual conditions that they want to insist upon aren't with one exception, all that out of the ordinary. They would like long term contracts, guarantees of payments....neither of these are unusual in any market. Although it has to be said that Iran's position as the major importer of oil into Greece in recent months has been bought precisely because they are the only people willing to trust Greek credit.
The third major provision, rules against unilateral cancellation of contracts, well, this isn't going to work at all. For sure, you can try to make sure that the private companies which are buying the oil can't cancel their contracts: but their home governments can always over ride this by insisting upon a legal ban on trading with one specific country. That's actually what sanctions mean, that political power over rules contract law. And no one is ever going to over ride the Force Majeure clause in every contract. Otherwise known as the "we'd love to complete this deal but the law, weather, asteroid strike, whatever, means that it's physically not possible" clause.
But the reason all of this doesn't matter a damn is much more basic. Oil is fungible. This means that it doesn't matter where or to whom Iran sells its oil, only that it sells it. If they decide not to sell to the UK, well, fine. The UK will just buy from Saudi, or Nigeria, or Angola. But, goes up the cry, what happens to those who were usually buying from Saudi, Nigeria or Angola? Well, Egypt (just as an invented example), instead of buying from Nigeria, because that oil has been shipped to the UK, will now buy the oil from Iran that hasn't been shipped to the UK. This is what fungible means. That it's all (and while there are minor differences, they are minor) the same stuff. As long as 85 million barrels a day are put onto the world market it just doesn't matter who is selling to whom.
Which is why the Iranian idea that they're not going to sell to those nasty people in the UK and France just doesn't matter. Because the oil will be sold to someone and France and the UK will just buy that other oil that the Iranians have dislodged from the original buyer.
Image source: Flickr. Used under Creative Commons License.
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Comments
#1 It Actually Does Matter Greatly
You assume the oil that France and the UK is buying from the other countries won't be marked up, which it most likely will be. The oil they were getting from Iran will have been cheaper than the oil they now have to get from some other country, such as Egypt. Thus, resulting in ihgher fuel prices the citizens have to pay due Iran no longer selling oil to these EU countries.