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Sanctions On Iran Provoke Fears About Oil Prices

One of the major concerns of critics of the withdrawal from the JCPOA was that oil prices would skyrocket if Iranian oil was taken off the market due to U.S. sanctions. During the first two years of oil sanctions under President Barack Obama, prices spiked to more than $100 per barrel. By contrast, in the first week following the imposition of sanctions by President Donald Trump, the price declined. Brent crude prices fell more than 20 percent from their four-year peak of $86.74 in early October 2018 to a three-year low of $55.69 on November 13 (Wall Street Journal, November 13, and 14, 2018). In March 2019, it had risen to around $65 (Nasdaq, March 8, 2019), still well below its earlier high. One reason for the moderate changes is that OPEC and Russian crude production has been increasing, more than offsetting losses from Iran.

Iran’s oil exports fell about 8 percent in the first two months following the U.S. withdrawal from the JCPOA, and that was before sanctions on oil kicked in. By March 2019, exports had fallen by more than half, from 2.5 million barrels a day to about one million (The Atlantic, March 17, 2019). Rather than avoid compliance as the Europeans hoped, shipping and oil companies have cancelled contracts and refused to trade with Iran. For example:

  • One of the largest deals between a European company and Iran involved the French oil and energy company Total, which signed a multibillion dollar agreement to develop Iran’s South Pars gas field in 2017. The company announced it was abandoning the project unless it receives an exemption from U.S. authorities (Reuters, May 16, 2018).
  • Japan’s major oil distributors are expected to suspend crude imports from Iran in October (Japan Times, September 2, 2018).
  • Refiners in India, Iran’s number two oil client after China, dramatically cut their monthly crude loadings and India’s oil ministry told refiners to prepare for a “drastic reduction or zero” imports from Iran starting in November 2018 (Reuters, September 14, 2018).
  • South Korea did not import any oil from Iran in September 2018 for the first time in six years (Reuters, October 14, 2018).
  • China National Petroleum Corp (CNPC) has suspended investment in Iran’s South Pars natural gas project (Reuters, December 12, 2018).
  • Japanese refineries have put a halt on imports of Iranian oil in anticipation of the May 2019 expiration of the temporary waiver on sanctions (Reuters, March 29, 2019).

The administration agreed to let eight countries – Italy, Greece , Taiwan, South Korea, Japan , China, Turkey and India to keep buying Iranian oil after it reimposed sanctions. One analyst called the waivers “a lifeline to Iran.” Another analyst countered, “The U.S. may use waivers to slow-walk implementation, but these will not apply indefinitely” (Reuters, November 2, 2018). Pompeo said the waivers were granted to the eight countries “only because they have demonstrated significant reductions in their crude oil and cooperation on many other fronts.” He said two of the eight were expected to end their imports of Iranian oil “within weeks,” and all must reapply for extended exemptions at the end of six months (New York Times, November 2, 2018).

The White House did not announce the exemptions but did put out a press release saying that “on November 5, 2018, all United States sanctions that were lifted under the disastrous Iran nuclear deal will be fully reimposed” (White House, November 2, 2018).

Russia reportedly agreed to a deal with Iran that would allow the country to circumvent U.S. sanctions to import oil (i24News, October 14, 2018). China was expected to help offset sanctions imposed on Iran’s oil industry; however, CNPC’s decision to stop providing sub-contracting engineering work and supplying production equipment, Iran will have difficulty maintaining its oil output (Reuters, December 12, 2018).

Iran complained in February 2019 that European nations have not responded to its offers to sell them crude oil despite having U.S. waivers. “We have called them many times, but they do not return our calls,” said Oil Minister Bijan Zanganeh, apparently referring to Greece and Italy, which were among eight nations granted waivers to import Iranian oil. (AP, February 5, 2019). He also disclosed that Russia had purchased shares of an Indian oil refinery, but, New Delhi, despite being exempted by Washington, does not allow the Russians to buy Iranian oil for the refinery. Taiwan is also on the list of the exempted countries, but it has stopped buying Iranian oil (Radio Farda, February 7, 2019).

U.S. Special Representative for Iran, Brian Hook, said on February 6, 2019, “Iran’s oil customers should not expect new waivers to U.S. sanctions in May.” He explained, “The November waivers were designed to prevent a spike in oil prices, and it appears that there will be enough oil supply to satisfy demand this year.” He added the U.S. would not offer exemptions for “oil or anything else,” adding that the U.S. aims to “get to zero imports to Iranian crude as quickly as possible” (Radio Farda, February 7, 2019).

The administration fears that waivers will allow the Iranians to wait out the Trump administration. Providing a waiver to China, however, is seen as a bargaining chip in trade negotiations. Ending the waivers risks causing oil prices to rise, though officials believe American and Saudi production could compensate for the loss of Iranian crude (Bloomberg, March 15, 2019).

As of April 2019, Hook said a total of 23 importers that once took Iranian oil had cut imports to zero, including three of eight countries (Italy, Greece and Taiwan) granted waivers (Reuters, April 3, 2019).

Following through on the earlier warning, the administration announced April 22, 2019, it won’t renew the waivers due to expire on May 2. “This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue,” according to a statement issued by the White House. “The U.S., Saudi Arabia and the United Arab Emirates, three of the world’s great energy producers, along with our friends and allies, are committed to ensuring that global oil markets remain adequately supplied,” according to the statement (Bloomberg, April 22, 2019).

By the end of May 2019, it appeared all of the countries that had received waivers were in compliance with the U.S. dictate to cease oil purchases. China, India, Turkey, South Korea and Japan have now ended all direct purchases of Iranian crude. Taiwan, Greece and Italy were unable to use their waivers due to banking and insurance issues (Wall Street Journal, May 27, 2019). Once U.S. oil sanctions are fully effective, Hook said the Iranian regime will lose $15 billion in revenues, 40% of its budget (Wall Street Journal, May 30, 2019).

Pompeo said Iran attacked four oil tankers at the mouth of the Persian Gulf off the coast of the United Arab Emirates in May 2019 in an effort to push global crude prices higher (Radio Free Europe/Radio Liberty, May 30, 2019). The attacks were believed to be retaliation for ending waivers from sanctions for oil purchasers.