Removing Iran oil from market; challenges and consequences

SHANA — US President Donald Trump, who has unilaterally pulled out of the 2015 nuclear deal signed between Iran and six world powers, has threatened to reduce Iran’s oil sales to zero.

The main objective sought by the Trump administration is to drive down to nil Iran’s oil exports in November in a bid to impose its own policies.

Iran’s oil sector has already experienced embargo. But the difference is that in 2012 Iran’s oil buyers enjoyed sanctions waiver after cutting their oil purchase from Iran by 20% over a six-month period. This time, the Trump administration eyes a full halt to Iran’s oil exports.

Such unlawful and unilateral move by the US administration will lead to the failure of the policy of eliminating Iran from global oil market.

Bankrupt Policy

Although the US government has embarked on a diplomatic charm offensive to convince buyers of Iran’s oil to stop purchasing from Tehran in a bid to ratchet up unprecedented pressure on the Islamic Republic, global market rules do not follow Washington’s decision. To that effect, the US administration’s policy of imposing sanctions on Iran’s oil will face serious challenges for a variety of reasons:

  1. Oil Price Hike: Any decline in or halt to Iran’s oil exports would definitely impact global oil supply, which would in return introduce a shock to markets and drive up energy prices. In other words, any decline in or halt to Iran’s oil exports would pressure oil markets to unprecedented levels since the 1973-1974 and 1979-1980 oil crises. Oil prices will be on the receiving end of any such pressure on the market, which would definitely face strong opposition from big consumers like China and European nations.
  2. No Suitable Alternative: Iran is currently exporting about 2.5 mb/d of oil. The US has announced it will do its utmost to minimize any disturbance in oil markets through relying on Saudi Arabia and some other Arab oil producers; however, the reality is that no country, even Saudi Arabia, would be able to offset the market prospective shortage in the short term in case Iran’s oil is frozen out. First and foremost there are doubts about Saudi Arabia’s alleged spare capacity of 2 mb/d. Second, even if there is such capacity the Saudis will have to win over fellow OPEC members for any increase in output. Without a consensus, it would be impossible for the Saudi government to lift its output to such extent. Meantime, oil markets are hit by oil shortage due to war in Libya and domestic unrest in Venezuela, not to mention the drop in Angolan and Nigerian oil production. Therefore, a halt to Iran’s oil exports would create a void which may not be filled easily. Even if such void is filled with the turn of time, oil prices will be struck with shock in the short and mid-term.
  3. Consumers Independence: After the US unveiled its plot against Iran’s oil, many countries including India, China, Japan and South Korea disagreed as they are among traditional buyers of Iran’s oil. Under the previous round of sanctions, these countries showed their determination to keep buying Iran’s oil under any circumstances. What strengthens the position of the traditional buyers of Iran’s oil now is that Europe would not follow US sanctions. If the European Union’s proposed package for Iran covers oil sale, Iran will continue to sell oil to Asia and Europe.
  4. Producers’ Opposition: In addition to consumers’ concerns about any change in Iran’s oil supply, some producers remain opposed to the US decision to impose sanctions on Iran’s crude oil. Russia’s Permanent Representative to the United Nations (Vienna), Ambassador Extraordinary and Plenipotentiary, Mikhail Ivanovich Ulyanov, reaffirmed his country’s opposition to the imposition of unilateral sanctions on Iran, calling for Iran’s sustained oil supply on markets. He made it clear that Iran’s oil would stabilize global market.

Unrealistic Approach

The US initially claimed that it had no intention of granting any waiver to buyers of Iran’s oil, saying it was necessary for serving national interests. But as time passed and consumers resisted US pressure, Washington had to rethink and announce that it would consider sanctions waivers for some countries. The US is expected to grant exemption to India, Japan, South Korea and China to be able to keep buying oil from Iran.

Should the US refuse to grant such exemptions, it will face opposition in its anti-Iran policy. It has become common knowledge that the US’s unilateral actions against Iran have failed to win any consensus all across the globe. Even Washington’s European allies disagree with these sanctions. Furthermore, buyers of Iran’s oil will bow to US pressure to stop importing Iran’s oil only if they receive guarantees for their energy supply, which is impossible now.

Furthermore, any oil price hike would significantly drive up energy commodity prices, including gasoline prices, in the US, which would directly impact people’s everyday life. That would pose a threat to Republicans’ chance of victory in the midterm elections scheduled for November 6 this year in the US. That represents a big challenge for President Trump who has sought to prove himself as a successful head of state. Should he stop targeting Iran’s oil, his foreign policy will face challenges, but if he exerts pressure on Iran his party will be defeated in the mid-term elections.

While continuing to apparently impose tough sanctions on Iran’s oil sector, the Trump administration is unlikely to be able to force buyers of Iran oil to cut their imports from Iran.

Shuaib Bahman

Courtesy of Iran Petroleum