TRACKING >>It was another week of ratcheting in crude oil politics as President Donald Trump surprised Iran’s customers last week by demanding they halt the purchases, ending the sanction waivers to importers effective May 2. Trump reinstated the sanctions in May 2018, by dumping the 2015 Iran nuclear deal.
On November 4, 2018, the new sanctions took effect, with eight countries that are biggest importers of Iran’s oil: China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey exempted from sanctions, to find new markets for crude oil in six months. Three countries: Greece, Italy and Taiwan acceded to the American demands to end the purchases of Iranian oil.
Three close allies of the United States: Japan, South Korea and Turkey as well as China and India on the exempt list, would face sanction if they keep buying Iranian oil. The new sanctions also targets ship building, shipping, 50 Iranian banks and their subsidiaries, the national airline, and 200 members of the shipping industry and vessels.
To the Iranians, it is no more a sucker punch as it was expected. Iran’s petroleum export for 2018 was about US$52.7 billion translating to 47.6 percent of Iranian revenue. Analysts say the American tough stance would affect the gross national product of Iran, whose economy is already under intense pressure.
A White House statement last week said the decision “is intended to bring Iranian oil exports to zero, denying the regime its principal source of revenue.” The U.S. sanctions are meant to put maximum pressure on Iran to withdraw its destabilizing activities in the Middle East including Syria, Yemen, Lebanon and Iraq. Secretary of State, Mike Pompeo, told reporters that Trump’s decision not to renew the waivers showed his administration was “dramatically accelerating our pressure campaign in a calibrated way that meets our national security objectives while maintaining well supplied global oil markets.”
What is not clear is whether the United States would be able to enforce the sanctions. The threat of sanctions last year was greeted with waivers to stabilize the market as Trump appealed to OPEC on production cuts. Reuters reports that under US sanctions law, importers of Iranian oil including China, India and Turkey, could be allowed a wind-down period before getting to zero oil purchases, including a short-term waiver.
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China which buys about a third of Iran’s crude exports opposed the sanctions on the basis of unilateralism and long-arm jurisdiction. Out of the five permanent members of the Security Council plus one (P5+1): United States, Britain, China, France and Russia plus Germany that signed the 2015 Iran nuclear deal, the United States withdrew from the agreement. Analysts believe China and the EU’s stances on Iran sanctions are dead in the water as Pompeo vowed to pursue any company seeking to bypass the sanctions.
The EU, is trying to create financing mechanisms to insulate European companies from US sanctions, but most large corporations have already pulled out of Iran for fear of losing access to US markets or finance. The argument is that if China does not cut Iran oil purchases to zero, the Trump administration may block Chinese banks from the US financial system with unintended consequences for finance and business between the world’s two biggest economies, already in negotiations over trade disagreements.
The US decision affects Japan and South Korea which are heavily dependent on foreign oil. India, a main importer is feeling the heat, coupled with American pressure to cut oil purchases from Venezuela. Turkey has argued that as a neighbor, it cannot cut ties with Iran, as it badly needs the oil.
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Commentators believe that the policy and politics of the Trump oil equation, has increased in complexity. Pompeo said the Trump administration had been trying to find alternatives for close allies. Last week the price of global benchmark Brent crude rose by 3.33 percent to US$74.37 a barrel in trading after the sanctions waiver withdrawal announcement.
The US oil benchmark, West Texas Intermediate went up 2.90 percent at US$65.93. It again went down after President Trump’s tweet that Saudi Arabia and other countries in the Organization of the Petroleum Exporting Countries (OPEC) cartel “will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil.” With a soaring US crude inventory the WTI fell to US$63.28 on Wednesday.
With little room for negotiation some believe Iranians may resort to black market sales to keep afloat its economy. Iran’s geographical position may be another alternative; to block the narrow Strait of Hormuz in desperation. A huge amount of the world’s oil travels through Hormuz, at the entrance of the Gulf near Iran. All Saudi Arabia and UAE oil that will need to be produced to balance out the loss of the Iranian oil will pass through the Strait.
The United States Energy Information Administration, EIA says 28.9 percent of all maritime trade goes through the Strait. Iran’s economy also depends heavily on the flow of commerce through the Strait. It would also give the United States, its coalition allies, and its Gulf partners a casus belli and lead to war, which would undoubtedly end badly for Iran.