BY KEITH JOHNSON
The Trump administration’s demand that all countries quit importing Iranian oil outright starting in November won’t just be a tough sell diplomatically — it also threatens to derail the U.S. administration’s own effort to push down high crude prices. On Tuesday, State Department officials said that the administration is taking a much tougher line on Iranian oil exports than the Obama administration did when it put sanctions on Tehran’s main source of revenue. President Donald Trump expects all buyers of Iranian oil to curtail all purchases by Nov. 4, with no waivers planned for countries that have few alternatives.
“We are asking them to go to zero,” a State Department official said on a call with reporters, adding that countries that buy Iranian oil should be winding down purchases now rather than waiting until November. “Without question, they should be reducing … they should be preparing now to go to zero.”
Even when the Obama administration enjoyed global support for its economic campaign against Iran beginning in 2012, it still had to rely on plenty of diplomatic arm-twisting and an assist from European Union sanctions to impede Iran’s oil exports. Now, many countries are reluctant to go along with Washington’s wishes, especially because Iran had been fully complying with the terms of the 2015 nuclear accord that lifted sanctions. The only thing driving some oil refiners in Europe, India, and East Asia to look for other suppliers is the fear of being locked out of the U.S. economy.
But it’s not clear that Iran’s biggest customers will comply. Between them, China, India, and Turkey account for about half of Iran’s oil exports. And the State Department official acknowledged that talks have yet to begin with any of those countries regarding curtailing sales.
“I really don’t see how this is feasible from either a political or market perspective,” said Richard Nephew, who helped negotiate the original oil sanctions on Iran and who is now at Columbia University’s Center on Global Energy Policy.
India, Iran’s second-biggest customer, struck a defiant tone last month after the Trump administration unilaterally pulled out of the Iran deal, saying it only respects United Nations sanctions, though it slightly reduced Iranian purchases this spring ahead of the U.S. decision to pull out of the pact.
And China, Iran’s biggest buyer, will be even tougher to persuade to limit purchases.
The country accounts for about one-quarter of Iran’s oil sales — some 600,000 barrels a day out of the roughly 2.2 million barrels a day that Iran exports — and Chinese demand for oil is growing at a steady clip. Chinese imports of Iranian oil jumped early this year to more than 700,000 barrels a day in March, the last month for which customs data is available.
What’s more, China is currently embroiled in an escalating trade fight with Washington. Beijing is casting about for ways to retaliate against U.S. tariffs announced so far, including higher duties already levied on $34 billion worth of Chinese goods with a further $216 billion possibly facing higher tariffs later this summer. Maintaining, or even increasing, purchases of Iranian oil would be a way to push back against Washington.
“I can’t see China or India going to zero even if the others do,” Nephew said.
Given the importance of the Chinese market for Iranian oil, some experts figure that the United States may be banking on resolving trade tensions with Beijing by the time the November deadline hits.
“I don’t think the State Department would have the confidence to say ‘zero exports’ if they didn’t have China on board,” said Sara Vakhshouri, a veteran of the Iranian state oil company now at SVB Energy International, an energy consultancy.
The administration will also have to persuade other big buyers, including Japan, South Korea, Turkey, and members of the European Union, to forswear Iranian oil.
Japanese officials said last week, after U.S. diplomats pressed the country to cut back its purchases, that they were still deliberating. Turkish officials told Foreign Policy Tuesday the government had no reaction yet to the new U.S. demands.
The EU, which still supports the Iran nuclear accord, sought to shield European companies from U.S. sanctions, but the companies that actually buy Iranian oil are already limiting their purchases for fear of falling afoul of the U.S. Treasury.
An EU spokesperson said Brussels is in regular contact with Washington regarding the oil sanctions and stressed that “the EU remains fully committed to the nuclear deal and to the full and effective lifting of all nuclear-related sanctions on Iran.”
The bigger problem is that, the more successful the United States is at cutting off Iran’s oil exports, the harder it will be to ensure plentiful supplies of cheap and affordable oil right when global demand is at its strongest level of the year. And pricey oil could be a political liability ahead of the U.S. midterm elections this fall.
Crude prices jumped after the Trump administration made clear its zero-tolerance policy toward Iranian exports, with prices topping $71 a barrel in New York and $77 a barrel in London.
Last week, OPEC and Russia cobbled together an agreement that would see additional oil output in the coming months, designed as a way to push down prices, which have reached a three-and-a-half-hear high. Saudi Arabia and Russia are expected to make up the bulk of the extra oil production, since few other big oil producers have room to ramp up output significantly, if at all.
The administration’s tough new stance on Iranian exports, which goes far beyond what the Obama administration demanded and what most market experts were expecting, suggests that Russia and Saudi Arabia have agreed to make up whatever Iranian production is taken out of the market, Vakhshouri said.
But actually replacing more than 2 million barrels a day of Iranian crude exports won’t be easy. Saudi Arabia is planning to push up oil production to record levels of about 11 million barrels per day starting in July, Reuters reported Tuesday. That level would represent an increase of about 1 million barrels a day over what Saudi Arabia has been pumping this year. Saudi officials maintain that they can pump even more oil, as much as 12 million barrels a day, a level it has never before reached.
But Russia, which has been pumping around 11 million barrels a day, has only has a limited ability to increase supplies in the near term. Even the United States, with record oil production of its own, has a limited ability to increase output much more this year due to infrastructure constraints.
And the move to take Iranian barrels off the market isn’t the only thing that could send oil prices higher: Venezuelan oil production continues to decline, and Libya’s ability to sustain even limited oil exports is in question given political turmoil in the country.
“I can’t see how this market ponies up 2.3 to 2.4 million barrels a day in the next four months, at least without sending prices through the roof,” Nephew said. “So, frankly, I expect the administration will be explaining how they didn’t get to zero come November.”
Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_F
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