A gap in U.S. law has allowed China to import nearly $500 million of additional oil products from Iran this year while avoiding U.S. sanctions, demonstrating Washington's challenge in designing effective measures to target Tehran.
The Chinese imports pose a delicate issue for the U.S., which is trying to curb Iran's nuclear ambitions through sanctions without harming relations with fast-growing Asian countries that depend on Iranian oil.
U.S. sanctions law is designed to punish any country that imports Iranian oil, but it gives the State Department broad flexibility to exempt countries that are reducing their purchases of crude oil. State has repeatedly given exemptions to China on the grounds that Beijing is buying less crude oil from Iran.
The latest twist stems from a gap in the sanctions law: When discussing exemptions, it mentions only crude oil, not fuel oil, a byproduct of refining crude into more expensive products such as diesel and gasoline. While fuel oil is significantly less valuable than other refined fuels, some Chinese refineries can process it into more valuable fuels.
China imported 5.4 million barrels of Iranian fuel oil valued at $495 million in the first seven months of 2013, according to Chinese customs data, up from less than $1 million in all of 2012. China has purchased more Iranian fuel oil this year than in the past four years combined, according to the data.
By increasing fuel-oil imports, China has offset some of Iran's lost revenue from lower crude exports. China imported 3.3 million fewer barrels of Iranian crude in the first seven months of 2013 compared with the same period a year earlier, according to customs data. This year's crude imports were valued at $9.5 billion, down $850 million from a year earlier as a result of both lower volumes and weaker oil prices.
"This is widely recognized as a loophole that you can drive an Iranian oil tanker through," said Mark Dubowitz, executive director at the Foundation for Defense of Democracies, a Washington think tank that has pushed for more sanctions against Iran.
The U.S. sanctions target financial institutions that conduct oil trades with Iran's central bank by banning them from doing business in the U.S. Congress passed the law in late 2011 in response to Western charges that Tehran is seeking to develop nuclear weapons. Iran says its nuclear program is for peaceful purposes.