By Nick Cunningham, a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. Follow him on Twitter @nickcunningham1. Originally published at OilPrice.
The Trump administration is trying to replicate the Obama-era strategy of shutting in Iranian oil exports as a way to pressure the regime into making a series of concessions. But there are several reasons why Trump may not succeed.
It isn’t that Trump’s sanctions won’t be as effective, despite the refusal of the rest of the international coalition to go along with Washington’s isolation campaign. In fact, even though the EU, in particular, is hoping to shield Iran from the wrath of the U.S. Treasury, international companies are packing up and leaving Iran and refiners around the globe are starting to cut their oil imports from Iran. So, yes, there is every reason to believe that the sanctions will have real bite.
The main problem that could frustrate the Trump administration is the oil market, which is in a very different place than it was in 2012-2015. The oil market is tighter than it has been in years, which could ultimately force the U.S. to go easier on Iran than it would like.
A cursory glance at oil prices for the period in which the Obama administration pushed sanctions on Iran shows elevated prices, which would lead one into thinking that the Obama administration also had to contend with a tight oil market. Brent crude routinely topped $100 per barrel during a time in which Iran saw around 1 million barrels per day of exports disrupted.
Brent is now significantly lower than that, so Trump should have no problem cutting Iranian supply off once again, right? Not so fast.
President Obama had the fortune of an exploding U.S. shale sector. It probably wasn’t obvious to the Obama administration what was unfolding in North Dakota and Texas when sanctions on Iran really started to hurt in 2012. U.S. oil production skyrocketed between 2012 and 2014, rising by over 3 mb/d, which more than compensated for the 1 mb/d of lost Iranian supply.
To be sure, the Trump administration is also presiding over a shale boom. U.S. production is up about 1.6 mb/d since Trump took office, and output in 2018 has increased by around 400,000 bpd year-to-date. However, the problem for Trump is that Permian bottlenecks could mean that additional growth slows to a crawl, at least for the next year or so. That means that as the U.S. begins to cut into Iranian supply, U.S. shale drillers will not be able to compensate for the losses.
It isn’t just about U.S. supply versus Iranian supply though. The broader market is trending in a much tighter direction than it was back then, despite the difference in prices. Outages in Venezuela, Libya and Angola have tightened the market much faster than expected. More importantly, at least in the case of Venezuela, the losses are set to deepen.
Then, of course, there is the decline of inventories, which has picked up pace this year. OPEC+ has spent a year and a half trying to get inventories back to the five-year average, an objective that was achieved earlier this year. But now, because the current supply/demand balance reflects a deficit, inventories are set to continue to decline.
“The previous sanctions episode was only possible, in our view, because U.S. shale production was growing at a very fast clip and Libyan output came back to the market to replace some of the missing Iran barrels,” Bank of America Merrill Lynch wrote in a research note. “Plus, other OPEC members were still running with some spare capacity and global oil demand was rather sluggish. In contrast, we now project global oil supply and demand balances to remain in a structural deficit for most of the next six quarters.”
The upshot is that even though Obama slapped sanctions on Iran when oil prices were high, he had a series of tailwinds at his back that Trump will not enjoy. The oil market is tight and any effort to shut in Iranian supply will exacerbate the situation.
Moreover, the Obama administration took a careful and deliberate approach to sanctions, precisely because it wanted to avoid pushing up prices. U.S. politicians are always highly concerned about the political damage of high gasoline prices, which is a big reason why the Obama administration offered some pretty reasonable waivers to multiple countries that bought Iranian oil. The rule of thumb was that if a country cut imports from Iran by 20 percent, that was pretty good, and they received leniency from Washington on the rest.
The Trump administration instead has vowed some sort of “zero tolerance” policy, hoping to shut in as much Iranian supply as possible. The U.S. State Department said it would not be inclined to grant any waivers. Those comments alone sent oil prices shooting up in June.
But, the Trump administration might be forced into backing down if prices spike too high. Bank of America Merrill Lynch says that “a complete cutoff of Iran exports would be very hard to manage and likely result in an oil price spike above $120/bbl.”
John Kemp of Reuters summed it up earlier this month: “The White House can drive Iran’s oil exports to zero, or it can have moderate U.S. gasoline prices, but it probably cannot have both.”
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Since I am totally ignorant on this subject, would any of the good readers here mind explaining why it is that the US is able to exert so much authority of why and when other countries can buy oil from places we have imposed sanctions on? I get that US companies aren’t allowed to, but am not grasping why other countries would feel the need to bend to our demands.
Thanks in advance for humoring my ignorance on this.
Just saw this:
https://www.reuters.com/article/us-usa-iran-oil/us-will-consider-requests-for-waivers-from-iran-oil-sanctions-pompeo-idUSKBN1K0236
Looks like the Trump administration is already softening its stance.
One reason is that the US will put sanctions on companies and countries that don’t cooperate. Also our currency being used to buy oil is another factor. The process is not unlike what organized crime does.In the very near future with Trump abandoning our traditional allies, this could change how they react to sanctions.
The US controls the global financial system and no one has provided an alternative. It has indicated you can trade with the US or Iran but not both under the new sanctions regime. It is obvious choice will entity businesses will choose.
Also US is prepared to attack allies with additional trade sanctions if they don’t comply. E.g. US forced the shut-down of The Pirate Bay in Sweden by threatening to implement trade sanctions on Sweden.
Also, I would be surprised if CIA hasn’t extracted or planted compromisinh info about all key persons and using it when needed.
Hard to believe that traditional buyers of Iranian crude — India and China to name two — will stop just because a stripedy-pants, blue-eyed yankee named Sam tells them to.
It’s not just a matter of flipping a switch. Refineries are optimized for a particular blend of crude; switching to another source reduces throughput and change the product mix.
The US objective of cutting Iranian exports to zero is an act of war which threatens Iran with economic collapse. Iran has every right to oppose this unprovoked lethal attack.
The question is how Iran proportionately responds. Shutting down the Straits of Hormuz is temprorary. Iran is not a cyperwar hub.
Don’t know about china, but India is already attempting to reduce its imports from Iran. See this:-
https://thewire.in/diplomacy/iran-india-promised-investments-chabahar
Your last line is +1000
We’ve seen peaceful Palestinians oppose their Gaza imprisonment and how the western media makes that into a hostile act. Therefore no type of Iranian opposition will garner any sympathy in the West. 99% of us will ignore the issue. Meanwhile our ruling elites and media will protray anything less than total capitulation as an Iranian hostile act.
Ironically, probably the best tools the Trump Administration has to enforce Iran sanctions for a long time is to reduce the US demand for oil in the coming years by keeping the Obama auto fleet fuel efficiency standards, encouraging the development of hybrid and electric vehicles, and encouraging solar and wind power developments.
Rising oil and gas costs would be the most likely pressure point on the US to back off on sanctions as that will impact his base significantly.
Trumps trade “war” with China is also entering into the mix. China is getting ready to place a tariff of 25% on oil imports from the US, which average about 500,000 barrels a day. Guess where they are going to buy that oil from? You got it. Iran.
…and the blankety-blank disease of the World Petro-Dependent Political Economy continues, unremarked except in remote outposts of Autarkian Resiliency…
But lots of really smart credentialed people ponder and pontificate over the details of the placement of the deck chairs on the unsinkable ship, as it forges new speed records…
How long until the rest of the world decides it is time to box in the US?
I’d guess that this time around that countries like Russia, China and Turkey will say the hell with these sanctions and continue to buy Iranian oil. Why should they put the brakes on their economies just to satisfy the latest whim coming out of Washington?
Trump has already declared trade war on China so they may not be in a mood to throw a spanner into their energy sourcing. Russia may be sanctioned but they are paying for Iranian oil in goods, not US dollars and they are so used to being sanctioned by the US that it may get boring. If Turkey gets sanctioned then Turkey may tell the US to remove themselves from Incirlik Air Base.
In any case, it would not be beyond Trump to meet with the leader of Iran next year and agree to lift sanctions so long as it would be only US companies that would be allowed to get contracts in Iran – and thus closing out EU and any other counties’s companies that obeyed Trump’s orders. I would not put something like that past him.
“Why should they put the brakes on their economies just to satisfy the latest whim coming out of Washington? ” @ the Rev Kev
It is the latest whim of Riyadh and Tel Aviv coming out of Washington. It is time to admit that the United States has become a colony of Saudi Arabia and Israel. Oil prices can reach the sky and our rulers in Riyadh and Tel Aviv will be all the happier.
You may be right there. Netanyahu has just told Putin that if he forces Iran out of Syria, then he will have the US lift all sanctions from Russia. Funny that. I have looked at the table of organization for the US government but just can’t find him anywhere in there.
As for Saudi Arabia, America’s biggest mistake of the 21st century was that they should have invaded that country instead of Iraq. They could have grabbed all that lovely oil for themselves and after all, three-quarters of the 9/11 terrorists were from Saudi Arabia.
It never ceases to amaze me just how ‘reactionary’ progressives can become by supporting a regime made up of self-serving mullahs who took over the whole country made up of formerly moderate and educated populace and turned it into radical Islamic theocracy that even forced Sunni Wahhabis to compete with it for extremism.
Sanctions hurt the general population much more than the elite, who are self-serving in most countries, not just Iran. There are many moderate and educated people in Iran who are not prepared to assist a foreign country in overthrowing their government, despite their dissatisfaction on various fronts.
If the democratically elected government of Mossaddegh had not been overthrown in 1953, the region would look a lot different today.
When the US complains about human rights in Saudi Arabia as loudly as it does about human rights in Iran, then and only then will we know they are sincere.
What amazes me is how quickly people respond to phony and cynical human rights rhetoric in the service of yet more calamitous regime change. The US plays this game over and over and it works every time. When are Americans gonna learn to recognize war propaganda?
Yes, women have better rights in Iran than in Saudi Arabia.
And last I checked, Iran wasn’t engaging in a genocidal war with a neighbor that is expected to result in 9 million deaths, as in more than the Holocaust.
Better trolls, please.
Straw manning is a violation of our written site Policies. And commenting here is a privilege, not a right.
Since when is an analysis of how the sanctions on Iran might have to be rolled back due to the US not being able to take the impact on oil prices tantamount to “supporting a regime”? You are shooting a messenger…..or more likely, are so deeply anti-Iran that you feel compelled to attack any site that uses the word “Iran” without criticizing the regime.
Take you hasbara elsewhere.
Yeah, not wanting to see a whole region of the world engulfed in catastrophic bloody war for the benefit of a few reactionary regimes and arms manufacturers means we’re supporting the Iranian theocracy. /s
Rather the mullahs, than the Shaw and his police state.
So… exactly what “concessions” is Iran supposed to make? They’ve given up the possibility of nuclear weapons and allowed thorough inspections which was the big casus beli a little while ago and got nothing in return but more hostility. It’s pretty obvious the U.S won’t be satisfied until Iran is a chaotic, utterly destroyed failed state (just like all the other official enemies of late). I don’t see the Iranian government (or the people) being willing to have that happen to them.
A good article, except for that opening and the word “concessions”. It implies the US/Israel/Saudis can be reasonable on this matter. The simple fact is that, following the counter-revolutionary tradition of the British, nothing will satisfy the Americans until the Islamic Revolution is destroyed. Going back to it’s alliance with Saddam, the US has had only one goal: punish the Iranians for revolting. This is the normal treatment for any developing nation which dares to step outside the Anglo-American economic system which has been preying upon the Third World for centuries.
Fortunately time is on the Iranian side. The Asians are building an alternative economic system and nothing less than WW3 will stop them. Iran is poised to plug into this system. The Chinese and Russians are backing the SCO with gold. The Anglo-American system is now only backed with debt. So long as Iran can avoid war for a bit longer they stand to be better off in the long run. Certainly better off than a country like Canada,which rose riding the coattails of two empires and is now about to embark on a descent to who knows where. I think it’s called Poetic Justice. Unfortunately real life isn’t poetry. Keep your fingers crossed for the sake of every Iranian.
@EionW
The Chinese and Russians are backing the SCO with gold. The Anglo-American system is now only backed with debt.
Actually the financial/economic system we in the west (not just anglo-american) live in is not actually “backed” with debt. It’s built on debt, and supported by force of arms. Chairman Mao pointed it out long ago (probably before any readers here were born), and it’s still completely true. Power grows out of the barrel of a gun. Empirical proof is all around you.
There are so many moving parts to all this, and so much effort to evade/hide/shade/create the true situation (over so many decades) that all we can see is the general direction. That is the same general direction as the Roman Empire at the height of its unquestioned military supremacy. It may take as long to unwind, but one suspects not.