An oil production platform  in Iran's Soroush oil fields. Photo: Reuters / Raheb Homavandi
An oil production platform in Iran's Soroush oil fields. Photo: Reuters / Raheb Homavandi

The Trump administration’s imposition of severe sanctions on Iran have three crucial objectives.

The first is to render the constraints on the Islamic Republic’s nuclear program under the Joint Comprehensive Plan of Action (JCPOA) permanent. The second is to cut Tehran’s support for regional militant groups and thus curtail its influence in Syria, Iraq, Yemen, and Lebanon. And finally, they aim to dismantle Iran’s ballistic missile program. These are the stated goals.

The ultimate goal of the sanctions in US Secretary of State Mike Pompeo’s words is “to convince the regime to abandon its current revolutionary course” and “do a 180-degree turn … and act like a normal country.”

Given that it’s near-impossible for the regime to give up its revolutionary ideals and make a U-turn to conform to President Donald Trump’s concept of a “normal country,” Washington’s underlying objective appears to be regime change in Tehran, or at a minimum, giving the US an advantage in the global oil market.

Crisis – not collapse

For the US sanctions to be successful, they must facilitate a critical political breakthrough in Tehran.

The case of Iranian regional influence in Yemen might be a revealing example of Washington’s misguided goal-setting. Though supported politically by Iran, the Houthis in Yemen are not its puppets and it is not known how the sanctions might change Yemenis’ minds about their old disputes with the Saudis. Moreover, though the war is unbearably costly for Saudis – it is draining the country of its much-needed foreign reserves – the Houthis and their allies have modest means of fighting the Saudis that are not easy to undermine.

The Houthis have no expensive airplanes or high-tech weaponry, and no mercenaries hired overseas. They mostly use armaments they seize from the Saudis or simple and easily obtainable weapons such as AK-47s, RPG-7s, etc.

As for Iran’s missile program, the sanctions might not have the desired impact. Because the missile technology has been under strict sanctions for a long time already, it has become extensively indigenized and resilient.

A distinction needs to be drawn between a crisis and the collapse of the system. Sanctions will hurt the Iranian economy deeply, but this does not mean they will bring Tehran to its knees

But what about Washington’s not-so-clearly stated objective: economic hardship that may result in civil unrest and even a popular uprising, putting pressure on the regime to make ideological concessions, or even cause it to collapse? Perhaps something like the bread uprisings of January 2018 multiplied manyfold.

There is no doubt that the sanctions will hit the Iranian economy hard and especially hurt ordinary people – they are designed to achieve exactly that. The IMF has projected that Iran’s economy will contract by 3.6% next year, which is even worse than this year’s projected 1.5% fall. Add to this the inflation rate of 40% by year-end, a deep recession and soaring unemployment, and the sanctions are no less than a full-scale crisis for the economy of Iran – and this also means public outrage.

However, a distinction needs to be drawn between a crisis and the collapse of the system. Sanctions will hurt the Iranian economy deeply, but this does not mean they will bring Tehran to its knees.

There is also an ever-deepening disagreement between Trump and the EU3 (UK, France, and Germany), Russia, and China over the sanctions, which will limit maneuvering space for Trump in the future.

Oil politics

When searching for the underlying motivations behind the US sanctions, they may be found in the changing dynamics of the global oil market.

It might be the case that elements within the administration in Washington are more concerned with chasing Iran out of the highly congested oil market than reaching a reasonable and achievable solution. A quick look at the oil market provides some insight.

The price of oil has tumbled to $50 this month, down 30% in seven weeks. This was partly due to Trump’s sudden concessions to eight countries on Iran sanctions, which neutralized expectations of a decrease in global supply. This is also part of a larger trend of supply outstripping demand in the global market.

Global oil demand is expected to rise by around 1.4 million barrels a day next year, according to the International Energy Agency (IEA)’s estimates, but the supply is expected to increase by 2 million barrels per day, which can partly offset the losses from Iran and Venezuela. The slowing global demand is caused by shrinking global economic growth, partly because of Washington’s tariff war on Beijing, which is the biggest importer of crude – 15% of global imports.

The American share of the increase in global supply is also huge. The US has produced an average of 10.9 million barrels per day in 2018 and its average production of crude will be 12.6 million in 2019. Many shale-oil producers have become more efficient at extraction and they can be profitable even with lower prices. Much of these increases in production is expected to flow into export markets.

In this harshly competitive market, removing Iran – which has 9.3% of the global proved reserves and was responsible for 5% of global production in 2017 — would be a gift for expanding US oil companies. 

The US is working to consolidate its place in the global oil market. The motivation for making concessions on Iran sanctions might have been to keep oil prices low during the November midterm elections in the US but, more importantly, to prevent the market from being taken over by Russia or OPEC until the construction of three pipelines adds around 2 million barrels of US Permian oil a day to the transportation capacity six months from now.

The US oil exporting sector – which CitiGroup projects to become the world’s top oil exporter (including crude and other refined products), surpassing Saudi Arabia next year – is the direct beneficiary of Iran sanctions.

2 replies on “US seeks oil market edge with sanctions against Iran”

Comments are closed.