Obama administration brushes off oil price impact of Iran sanctions

The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration’s thinking. Against worries that the sanctions have gone too far, too fast — removing too much Iranian oil from the global market — the Administration intends ...

Kevork Djansezian/Getty Images
Kevork Djansezian/Getty Images
Kevork Djansezian/Getty Images

The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration's thinking. Against worries that the sanctions have gone too far, too fast -- removing too much Iranian oil from the global market -- the Administration intends to continue trying to choke off Tehran's oil revenue, with the hope of forestalling its nuclear development.

The Administration is pursuing two conflicting containment goals: to halt Iran's acquisition of nuclear weapons, and cap surging oil prices during an election year. Its bet is that it does not have to ease up on the former in order to achieve the latter.

The U.S. Treasury Department has clamped on banking restrictions punishing institutions that facilitate payment for Iranian crude, and U.S. officials have traveled around the world to persuade importing nations to buy less Iranian oil. The European Union meanwhile has decided to halt all Iranian oil imports by July 1. Analysts think that these dual tracks have worked so well that it is as though we are already at July 1 (pictured above, gasoline prices in Los Angeles three days ago).

The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration’s thinking. Against worries that the sanctions have gone too far, too fast — removing too much Iranian oil from the global market — the Administration intends to continue trying to choke off Tehran’s oil revenue, with the hope of forestalling its nuclear development.

The Administration is pursuing two conflicting containment goals: to halt Iran’s acquisition of nuclear weapons, and cap surging oil prices during an election year. Its bet is that it does not have to ease up on the former in order to achieve the latter.

The U.S. Treasury Department has clamped on banking restrictions punishing institutions that facilitate payment for Iranian crude, and U.S. officials have traveled around the world to persuade importing nations to buy less Iranian oil. The European Union meanwhile has decided to halt all Iranian oil imports by July 1. Analysts think that these dual tracks have worked so well that it is as though we are already at July 1 (pictured above, gasoline prices in Los Angeles three days ago).

I made a round of calls in order to get under the Administration’s thinking about a persistent narrative out there — that high oil and gasoline prices (oil is above $106 a barrel in the U.S. today, an 8 percent increase for the year, and $125 a barrel in Europe) threaten the U.S. and global economic recoveries, and that political risk associated with Iran are largely to blame.

Falling squarely within the group of worriers, the Eurasia Group’s Ian Bremmer, David Gordon and Cliff Kupchan wrote yesterday in the Financial Times:

removing too much Iranian oil from the world’s energy supply could cause an oil price spike  that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time, sanctions have the potential to be ‘too successful,’ hurting the sanctioners as much as the sanctioned.

Reuters reported on the same line of thinking.

The Administration’s logic in brushing off these concerns is interesting: It does not dismiss that the sanctions have been successful. Iran in fact is shipping 300,000 to 400,000 a barrels a day less than its usual 2.5 million barrels a day, according to Bloomberg. Last week, the U.S. Energy Information Administration said in a report that much of that Iranian oil isn’t being exported because insurers won’t issue policies for the shipments.

Instead, the Administration has concluded that, short of a fresh crisis in some other place, this is as bad as it gets: Global markets have already priced in the trouble in Iran; the volume of Iranian crude to be lost to the market is already gone. And since the U.S. and global economies are still recovering, there is little need for further concern.

"There is significant pressure but not enough to tip prices higher in the absence of something else happening," says David Goldwyn, a private consultant who until last year was the State Department’s coordinator for international energy affairs. There is "worry about what if something else happens," but in the case of lost supply from Nigeria, a blown-up pipeline elsewhere, or a devastating hurricane, the Administration would consider releasing volumes from the Strategic Petroleum Reserve, Goldwyn told me.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

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