For half a century the Middle East’s petro-monarchies have established themselves as reliable suppliers of low-cost petroleum. The third Gulf War, now in its fifth week, has shattered that image. with The Strait of Hormuz is largely closed15% of the world’s oil does not reach its customers. All Gulf countries have cut production and seen a decline in export earnings.
All times one. As its tankers continue to move through the strait (see Chart 1), Iran is now earning almost twice as much each day from oil sales as it was before the American and Israeli bombs fell on February 28. It may be crushed on the battlefield, but the regime is winning the energy war.
It is difficult to track how many barrels of the world’s largest exports escape sanctions. Its tankers are more secretive than ever, commercial providers of satellite imagery have halted their updates for the region and electronic scuffles have spread fog across the Gulf. But a source with knowledge of Iran’s oil accounting, who spoke to The Economist on condition of anonymity, confirmed that the country is currently exporting 2.4m-2.8m barrels of oil and petroleum products per day (b/d), including 1.5m-1.8mb/d of crude. This is the same, if not higher, than last year’s average. It is also sold at very high prices.
Moreover, Iran’s oil machine has adopted methods that make it more resilient to attacks and sanctions. Most of the income is now going Islamic Revolutionary Guard Corps (IRGC), the regime’s elite fighting force. And China is playing an active role in allowing money to flow. Iran’s war chest lies buried deep in Asia, safe from Israeli armaments.
Iran’s oil business rests on three pillars: salesmen, shipping and shadow banks. Start with the sales force. Like most petrostates, Iranian oil exports are nominally controlled by the state-owned producer, the National Iranian Oil Company (NIOC). Practice is different. In a country with hard currency shortages, oil provides a type of liquidity. Government factions, from the Foreign Ministry to the police, have been given barrels which they can sell. Some religious foundations also have allocations.
According to multiple Iranian sources, all of these institutions are controlled by 20 or more oligarchs who use their networks to convert oil into cash. Some prominent figures, such as Ali Shamkhani, who once ran Iran’s Supreme National Security Council, are now dead. Others survive. Shamkhani’s son, Hossein, runs a trading and shipping empire. The faction around Mojtaba Khamenei, the son and successor of the late supreme leader who was killed on the first day of the war, is also involved in the oil business. Some of the traders are related to Gholam-Hossein Mohseni-Ajei, a top Islamic jurist.
Many of these individuals have ties to the IRGC. Emma Lee of ship-tracker Vortexa believes the force behind the recent surge in petroleum exports, which runs its own oil fields, has a hand in it. The son and son-in-law of the former IRGC commander-in-chief Mohsen Rezaei, who became military advisers to the younger Mr Khamenei in March, are said to carry a lot of the barrel. The IRGC’s international branch, the Quds Force, controls 25% of Iran’s crude oil production. This decentralized structure is difficult to destroy from the air.
During the war, the IRGC has also tightened its grip on shipping, another pillar of Iran’s oil business. This force controls Hormuz and controls transportation and communications throughout much of the Gulf. Private companies, primarily owned by the IRGC or affiliated with Khatam al-Anbiya, another branch of the armed forces, coordinate most of the freight logistics with NIOC. They include Sahand (an industrial firm), Sahara Thunder (a trading business), Pasargad (a financial group), Admiral (Mr Shamkhani’s shipping firm) and Persian Gulf Petrochemical Company, which runs oil-processing plants. All are subject to US sanctions for acting as shell companies.
Iran’s logistics experts work hard to keep tankers out of harm’s way – the cargo can be worth $150m-200m, five to ten times the value of the clunkers carrying it. On Kharg Island, where 90% of Iran’s crude oil typically originates, ships at the outermost “T-jetty” (see map, below) now operate with emergency escape procedures. In the event of an attack, ships can cut the mooring lines and sail away without the assistance of tugs. Ajarapada wharf, which handles the largest tankers, has reduced usage from two of its berths due to safety reasons. Shuttle tankers run between Kharag, nearby islands and storage ships.
America has bombed military bases in Kharg and threatened to take over the island. But the IRGC appears to be preparing for such a scenario. The smaller Jask, Lavan and Sirri terminals are operational and accumulating record stocks (see map, top). Richard Nephew, the former US envoy to Iran, believes that by applying maximum pressure, he and others could take over 25% of what Kharg currently exports.
All details of ships, including cargo, crew names and destination, are reported to the IRGC through intermediaries upon departure. A source says a passcode is issued after the force is vetted by the naval command. As ships approach the strait, they are asked to provide a code by radio; If approval is granted, a small IRGC boat takes them away. They will often cross not through the middle, as they used to do, but through a narrow corridor along Iran’s coast, where forces can conduct greater verification. Some tankers are being asked to pay tolls worth several million dollars, according to shipping journal Lloyd’s List. Their transponders are switched on briefly to avoid collisions – before being switched off again as the tankers enter the Indian Ocean.
Despite the US’s decision last week to waive sanctions on the sale of nearly a record 150m Iranian barrels already at sea, Iranian tankers continue to use every trick available to conceal the origin of their cargo – stealing the credentials of other ships, forging documents, deceiving their locations. ”They think the exemption is a trap,” says a source familiar with Iran’s shipping business.” Most transfer their loads onto legitimate-looking ships on the high seas to Malaysia or Singapore for the final leg.
That end of the journey is almost always China, Which absorbs more than 90% of Iran’s oil. Buyers There are about 100 small “teapot” refineries in Shandong, in the north of the country. On paper, these are independent from China’s state-owned giants, which fear exposure to US sanctions. The reality is even murkier. Some teapots count Chinese oil companies as customers. Shandong Shaoguang Looking Petrochemical, a teapot that has bought at least $500m of Iranian crude over the past few years, holds stakes in three joint ventures with state-owned enterprises.
Before the war teapots could get $18–24 a barrel at a discount to Brent for Irani Light, the country’s leading grade. Now that other Gulf supplies have been exhausted, that discount has declined to $7-12 a barrel. Taking into account normal freight costs from Malaysia, and Iranian light delivered to China, it is now more expensive than Brent (see Chart 2). Brent itself has surged, sending the futures price of an Iranian barrel for delivery in a few months to $104, three-quarters above pre-war levels.
This, coupled with government caps on gasoline prices that prevent refiners from passing all the costs on to motorists, is crushing Teapot’s margins. Even allowed prices have depressed Chinese demand for refined products (see Chart 3). But some state-owned refineries are considering buying Iranian oil under US waivers, one source said. NIOC rents large storage facilities in mainland China, which may be attractive to these companies. This will formalize China’s participation in Iran’s oil trade.
Similar formality would likely not extend to the Chinese presence in the third pillar of Iran’s smuggling complex—payments. Buyers of Iranian oil, Chinese or otherwise, pay by paying into disposable “trust” accounts opened for that purpose, often in small Chinese banks on the mainland or in Hong Kong. Those accounts are often registered in the names of shell companies set up by Chinese individuals for a fee. The oil proceeds are then funneled through countless other trust accounts to wherever Iran wants.
Some of the money remains in China, to pay for goods Iran wants to import. The rest is shipped around the world. The Economist obtained the names of two Chinese companies used to transfer Iranian oil money in recent months. Together with Kharon, a research firm, we determined that these companies have transactions with plastics manufacturers in India, Kazakhstan and Türkiye.
This shadow payment system is run by dedicated departments inside Iranian firms controlled by Iran’s Defense Ministry or IRGC, which operate like informal banks. The density of their network of accounts – numbering in the thousands – allows them to withstand shocks caused by war. In recent weeks the United Arab Emirates, once a haven for Iranian money, has shared extensive intelligence with the US on banks and companies linked to Iran. This has led Iran to abandon those channels and divert funds elsewhere.
A source with knowledge of the network says transactions are now routed through two or three additional layers of shell companies and handled with “extreme caution.” A group of Iran-linked accounts the man oversees, which held a combined $6bn-7bn before the war, have seen withdrawals as trustees sought to shelter the cash elsewhere. The source says there is no shortage of safe havens: bank accounts in East Asia, Britain, Germany, Georgia, Italy and Romania continue to be used.
The extreme redundancies present such complexity that it is becoming increasingly difficult for even Iran’s central bank to trace the money – and easier for the country’s oil giants to move it out. But this oil keeps the machine running. Short of all-out attacks on Iran’s energy infrastructure – to which Iran would respond by bombing other Gulf states – it would not be strangled.
