Flout, follow or fudge

China has a sanctions dilemma. The biggest buyer of Iranian oil imported about 600,000 barrels a day in November, a third of total output. As the United States enacts new sanctions on the Middle Eastern state, and refiners in Europe pull back in anticipation of further curbs, China can choose to flout or follow. Expect it to fudge.

Imagine China chooses all-out disobedience. That would be in keeping with a policy of non-intervention in foreign countries’ domestic affairs. If China just bought, it could take up a big share of the 450,000 barrels a day of Iranian oil which sanction-imposing Europe is no longer taking. It would probably get a cut price — discounts of $30 a barrel are possible— from the desperate seller.

But the cost of snubbing the United States could be high. China has been buying energy assets in North America, including US shale fields and Canadian oil sands. That gives Uncle Sam leverage. Iran’s crude represents China’s energy past, but US shale technology is its energy future.

Still, obedience isn’t much more attractive. Freeze out Iran, and China would be left to compete with European buyers for supply in a tight market. A freeze would tempt Iran to agitate among China’s restive Western Muslim population, a nightmare scenario in China’s year of leadership change. And if Tehran cannot sell its oil, it would be more likely to go for the next-to-nuclear option of closing the Strait of Hormuz, needed to transport a third of the world’s seaborne crude oil.

That leaves the middle way: buy from Iran, but buy less. China’s listed oil majors have already cut imports from Iran as much as 50 per cent because of a dispute over payment terms. If they stick to those lower levels, the United States may turn a blind eye to China’s dealings with Iran, as it has before, leaving smaller and more opaque refiners to enjoy $70 dollar Iranian oil. By doing just enough and no more, China might get the best of both worlds.