by Aveek Sen
U.S. sanctions waivers for Iranian oil that the United States issued to China, India, Japan, South Korea, Italy, Greece, Turkey, and Taiwan won’t be renewed on May 2, according to the White House.
Iran retaliated by saying that it will close the Strait of Hormuz, a major naval choke-point, through which a fifth of the global crude passes. “If we are prevented from using it, we will close it,” the state-run Fars News agency reported, quoting Alireza Tangsiri, head of the Revolutionary Guard navy.
Senior Iranian oil analyst Reza Zandi said that with the discontinuation of oil sanction waivers, companies will be less likely to purchase Iran’s oil through the Iranian National Oil Company. Now it’s up to the governments of China, India, Turkey, and others to step in to guarantee the purchase of Iran’s oil.
The immediate result will be a spike in crude prices, says Vandana Hari of Vanda Insights, a Singapore-based provider of intelligence on the global energy markets. But she thinks that if OPEC puts more oil into the market to compensate for the cut, it will lessen the impact. If crude prices rise much beyond the current levels, she says, Donald Trump will likely lean on Saudi Arabia and OPEC to put more oil into the market. Still, she found it difficult to understand why Trump would risk a steep increase in crude prices since it would mean higher costs at the pump for U.S. drivers.
In that respect, according to Sara Vakhshouri, founder and president of Washington-based SVB Energy International, the timing seemed somewhat peculiar given its proximity to summer when gasoline demand in the U.S. hits its peak.
“But it will also have a psychological impact on both paper and physical oil prices, as it increases the risk of war and global-supply interruption,” she said. “Market anticipations of Iran’s different responses to the ‘Zero-export’ policy and potential supply interruptions create uncertainty and push prices even higher.”
China and Turkey opposed the removal of waivers. Iranian Foreign Minister Javad Zarif raised the possibility of mechanism for Turkish-Iranian trade like what Europe implement with INSTEX, a method to facilitate non-dollar trade. Turkish scholar Hakki Uygur is skeptical of such a move. The most important Turkish importers of Iranian oil are private companies with their own interests. “I don’t think it would solve Iranian financial problems in short term,” Uygur said about an INSTEX-like vehicle. “Even the European one hasn’t worked yet as intended.” In any case, if other outstanding issues between the United States and Turkey, such as arms deals and Kurdish forces in Syria, are not solved Turkey probably will not comply with U.S. sanctions completely.
Iraq, another country that has received a waiver from the United States, is recovering from a long-term violence, points out political scientist Mohammed Radhi, and depends on Iran to cover shortages in electricity. Pushing Iraq to cut those supplies will threaten the stability of the country by increasing public anger toward the political system. Radhi added that Iraq may be a subject to additional U.S. sanctions for its financial dealings with Iran in gas and electricity.
Hossein Aghaie Joobani, an Iranian scholar based in Turkey and contributing editor to Asian Politics & Policy, expects the U.S. decision to have devastating consequences for the Iranian economy. If Iran fails to export 300,000 barrels of oil per day, it will be very difficult for the government to keep the oil industry up and running, let alone prevent the stagnant economy from collapsing. The United States may not succeed in cutting Iran’s oil exports to zero. But the new decision will surely push the economy slowly but surely to the brink of collapse.
But Kenneth Katzman, an Iran and sanctions expert at the Congressional Research Service, doubts that exports will plunge so drastically. “There are numerous banks around the world, including in oil-importing countries, that do not have — or do not seek — a presence in the U.S. financial system,” he told LobeLog. “It’s therefore entirely likely that this U.S. end to the ‘significant reduction exception’ will not in fact drive Iran’s exports to zero. It will surely reduce Iran’s exports below the approximately 1.2 million-barrels-per-day level they were at as of the end of March… My personal gut estimate is that they will settle out at about 700,000-800,000 barrels per day as a new, permanent baseline [although the number might ultimately depend on whether any actual sanctions are imposed by the administration on partner country banks.”
According to Iran watcher Adnan Tabatabai, Washington’s Iran policy is “feel-good rather than strategy-driven.” It’s all about messaging, he added, and no one in the Trump administration is asking “and then what?” Sanctions are the only tool this administration seems to be capable of working with, based on the erroneous assumption that this approach alone will incentivize Iran to enter talks.
Andrey Baklitskiy, a Middle East expert at the PIR Center in Moscow, said that the U.S. decision not to extend waivers for Iranian oil has been made with domestic considerations in mind. The midterm elections have passed, and it’s 18 months until the presidential elections. If there’s a time for an oil price hike, it’s now. President Trump is well into the second half of his term, and Iran is still not willing to compromise. The Trump administration is focused on increasing the pressure on Iran. It’s not concerned about higher oil prices or the possibility of Iran developing nuclear weapons.
The administration’s announcement, Barbara Slavin of the Atlantic Council argues, is certain to face push back from major importers of Iranian oil, raise prices for consumers, and further erode the utility of sanctions as a non-military tool of U.S. foreign policy. Iranians will suffer, but their leaders will not bow to a U,S, government “drunk on unilateralism and coercion.” Indeed, the U.S. action will feed the Iranian narrative of victimization and enable the government to blame Trump for economic woes. It will not change Iran’s regional posture, especially at a time when the United States is withdrawing troops from the Middle East and cutting back on development and reconstruction aid. The step will increase pressure on Europe to finalize INSTEX and incentivize others to create new mechanisms to circumvent the U.S. dollar.
The impact on India, meanwhile, will be limited, maintains Manoj Pant, a professor of economics at The Indian Institute of Foreign Trade, because New Dehli will have thought a way around the sanctions. By December 2018, India had already cut imports from Iran by about 40 percent, and global demand for oil always declines in the summer months. According to S.C. Tripathi, former secretary of the Indian Ministry of Petroleum and Natural gas, the crude shortfall in India can be met by Saudi Arabia, UAE, Kuwait, Nigeria, Latin America, and the United States. For China, the shortfall can be met by Malaysia, Indonesia, and Russia. But the removal of sanctions waivers will add to the pressure on oil prices because of the volatile political situations in Venezuela, Libya, and Nigeria.
On top of that OPEC (and its cooperating non-members) has cut production by 1.2 million barrels per day (bpd). India, Japan, and South Korea should pressure the United States to get Saudi to restore this cut, Tripathi added. Iran’s departure from the market would remove 2-3 million bpd, but as much as one million bpd of that will come into the market through other sources like Turkey, Syria, Lebanon, Iraq, and the UAE.
Aveek Sen is an independent journalist working on cybersecurity and the geopolitics of India’s neighborhood, focusing on Pakistan, Afghanistan, Iran, and Bangladesh. @aveeksen.