Trump’s Iran Sanctions Could Work

In the medium term, they’ll make it hard for the country to keep up oil production, satisfy domestic demand, and fund the government.

Iranian protesters carry placards that mock U.S. President Donald Trump and Saudi Arabia’s King Salman and Crown Prince Mohammed bin Salman during a demonstration outside the former U.S. Embassy in Tehran on Nov. 4. (Atta Kenare/AFP/Getty Images)
Iranian protesters carry placards that mock U.S. President Donald Trump and Saudi Arabia’s King Salman and Crown Prince Mohammed bin Salman during a demonstration outside the former U.S. Embassy in Tehran on Nov. 4. (Atta Kenare/AFP/Getty Images)

Those who doubt that U.S. President Donald Trump’s Iran sanctions will hit their target should reconsider. It is true that their immediate impact on Iran’s oil export revenues will likely be minimal. But in the longer term, the effects of the sanctions regime could be significant. In fact, it could make it nearly impossible for Iran to sustain its current oil production.

Earlier this month, the United States reimposed bans on Iranian oil exports after announcing its withdrawal from the Iran nuclear deal in May this year. The agreement, negotiated in 2015, traded a reduction in international sanctions on Iran for limitations on the country’s nuclear development program. The Trump administration’s renewed embargoes target Iran’s petroleum and shipping industries and place limits on financial transactions that are critical to the country’s oil and natural gas exports.

Observers were immediately skeptical that the renewed embargoes would do much good.

First, as soon as the administration announced the new regime, it also granted waivers to eight countries—among them the largest importers of Iranian oil—including China, India, South Korea, Japan, and Turkey. In 2017, these five countries purchased 70 percent of Iran’s crude oil and condensate exports. China, a signatory to the nuclear agreement, makes up almost a quarter of Iran’s petroleum export market.

Second, beyond the waivers, the European Union and other signatories to the Iran deal have declared that they will abide by the agreement as long as Iran continues to fulfil its conditions. The EU has also pledged to compensate European firms affected by U.S. sanctions, and it is attempting to set up a “special purpose vehicle” to clear payments to Iran. The vehicle would bypass the more commonly used SWIFT trading system and could render transactions between the EU and Iran unmonitorable by the United States.

Despite such efforts, the extent to which EU-Iran trade will continue remains unclear. Major European companies in the energy, shipping, and insurance industries have announced that they will suspend cooperation with Iran. For example, Danish conglomerate A.P. Moller-Maersk—which is the world’s largest container ship operator and also has sizable wings for oil and natural gas exploration, drilling, and other services—announced on May 17 that it would halt all of its activities in Iran. “You can’t do business in Iran if you also have business in the U.S.,” Maersk Chief Executive Soren Skou said, “and we have that on a large scale.” His statement was issued one day after the French energy giant Total announced it would pull out of a multibillion-dollar project in Iran’s South Pars gas field if the company did not receive a waiver from the United States to bypass sanctions.

Third, the market itself might work against U.S. sanctions. Declines in Iranian oil sales will likely be offset by higher global oil prices, which means that Iran might never see its revenues fall. Throughout February, the Brent spot price for oil was in the low $60-per-barrel range. It spiked to $80 per barrel following the U.S. withdrawal from the Iran deal and this rose even higher to $86 per barrel in October thanks to collapsing Venezuelan production. The U.S. has worked assiduously with its allies in the Middle East to increase their production, but even so, prices have only dipped back to around $70 per barrel as of Nov. 9. Since the Iranian government’s budget is based on $55 a barrel, Tehran is still getting more money than it expected.

Even if Iran can easily weather the sanctions in the short term, the long-term picture is different. The country is the world’s fifth largest oil producer, but it relies on relatively mature fields for its output. Those fields have high decline rates—a measure of an oil field’s annual falloff in the rate of production to the point where it no longer produces profitably—of 8 to 11 percent. They also have rela­tively low recovery rates—the proportion of the oil in a given field that was ever recoverable—of 20 to 25 percent.

Prior to the signing of the nuclear deal in 2015, Iran had not brought a new oil field on stream since 2007. And it is unlikely that Iran will be able to develop new fields now, because it needs foreign investment to do so. Even China, which might normally provide the funding, is facing problems. Chinese investment usually passes through banks in Dubai, but Emirati banking authorities are cracking down on such flows.

If it can’t develop new fields, the country desperately needs to make better use of its old ones through the latest technologies for enhanced oil recovery. But for now, Iran relies on older and far more wasteful techniques, including pumping natural gas into the old oil fields to get out ever-dwindling amounts of oil. In fact, prior to the nuclear agreement, Iran reinjected 12.4 percent of its gross gas production back into oil wells.

Over time, gas reinjection will become less tenable. Iran’s household, commercial, and small industries sectors already account for slightly over 50 percent of Iran’s natural gas consumption, and consumption is rising. Another 14 percent goes to producing petrochemical products for export, such as ethylene and propylene, which serve as the building blocks for manufacturing plastics, fibers, and other chemicals. Petrochemicals make up a large proportion of Iran’s non-oil exports to China, and increasing such trade is one of Iran’s top priorities.

With U.S. secondary sanctions preventing Iran from obtaining enhanced oil recovery technologies, which are mostly produced in the United States or by firms in other countries wary of running afoul of Washington, Iran will have a hard time maintaining its oil production while satisfying increasing demand for natural gas and petrochemicals. In 2013 and 2014, the height of the previous sanctions regime, Iran had to grapple with the same problem. Unwilling to sacrifice oil production and fearful of cutting domestic electricity production, Tehran was forced to decrease gas delivery to its petrochemical plants, which caused a 7.5 million-ton drop in production and a loss of about $8 billion.

In the medium and long term, then, the latest U.S. sanctions could make things very difficult for Iran. As long as Washington can prevent it from obtaining vital enhanced oil recovery technologies, Iran’s economy will become increasingly fragile. The Iranian government’s lack of sufficient oil, gas, and petrochemical revenues to satisfy basic consumer demands while simultaneously financing bloated state and military institutions could induce Tehran to return to the negotiating table.

Michaël Tanchum is a professor at the University of Navarra in Spain. Twitter: @michaeltanchum

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