Trump’s Big Iran Oil Gamble
By seeking to cut Iranian exports to zero, the U.S. president is taking a major economic and political risk.
The Trump administration’s announcement Monday that it is ending waivers allowing several countries to keep importing Iranian crude is likely to push up oil prices and sour relations with U.S. friends and rivals alike that rely on Iranian energy, all while stoking more tensions in the waters around the Persian Gulf.
U.S. Secretary of State Mike Pompeo said Monday morning that the United States, in a bid to apply “maximum pressure” on Tehran, will not renew waivers that eight countries received last November to keep buying modest amounts of Iranian oil. The surprising move aims to drive Iran’s oil exports down from the current level of around 1.5 million barrels a day to close to zero, the administration’s long-stated goal since it pulled out of the Iran nuclear deal almost a year ago. The waivers expire on May 2.
Coming just two weeks after President Donald Trump said he would designate Iran’s Islamic Revolutionary Guard Corps as a terrorist organization, Monday’s decision represents Washington’s latest bet that it can amp up the diplomatic and economic pressure on Tehran without hurting the global economy or angering friends in Europe and Asia.
But it carries economic and political risks, especially with Trump entering a re-election campaign. Hence, the White House also announced Monday morning it is coordinating with Saudi Arabia and the United Arab Emirates, Iran’s regional rivals, to keep any supply disruptions and price hikes in check. Trump and Saudi Crown Prince Mohammed bin Salman spoke earlier this month.
Even so, Saudi officials said Monday that they are open to increasing production—but this time only after assessing the oil market impacts of the new U.S. sanctions policy, not before. Saudi Arabia felt burned last year when it increased production to offset Iran sanctions only to be blindsided by the U.S. issuance of waivers.
Pompeo said the policy of issuing waivers was over. “We will no longer grant any exemptions. We’re going to zero—going to zero across the board,” he told reporters, adding that how long the United States pushes for zero Iranian exports “depends solely” on whether Tehran changes its behavior.
“We have made our demands very clear to the ayatollah and his cronies. End your pursuit of nuclear weapons. Stop testing and proliferating ballistic missiles. Stop sponsoring and committing terrorism. Halt the arbitrary detention of U.S. citizens,” Pompeo said.
Most analysts had expected the administration would end up renewing most of the waivers, since oil prices are relatively high, and knocking a million-odd Iranian barrels out of the market would simply send them even higher right at the start of the U.S. summer driving season.
“We’ll see how the oil markets are after the initial shock has worn off but it’s going to be an expensive summer to travel,” said Neil Bhatiya, an expert on sanctions at the Center for a New American Security.
Many were taken aback at how sudden the decision was. State Department officials reportedly told waiver recipients this month they could expect renewals, before White House officials intervened and changed course. Both Trump and National Security Advisor John Bolton have been driving the administration’s hard-line stance despite pushback from European allies, which favor diplomatic engagement with Tehran.
There was “very little short-term planning that major importers would have wanted to see” from the Trump administration in the run-up to the announcement, said Suzanne Maloney, a scholar at the Brookings Institution. “This is not entirely unexpected, but it’s not on a timeframe that was well prepared.”
Pompeo said sanctions are depriving Iran of a key source of revenue. “Up to 40 percent of the regime’s revenue comes from oil sales. It’s the regime’s No. 1 source of cash,” he said. “Before our sanctions went into effect, Iran would generate as much as $50 billion annually in oil revenue.”
The latest U.S. move still carries plenty of risk, depending on just how fully countries such as China, India, and South Korea comply with the new American demands. All three remain major buyers of Iranian oil, together purchasing almost 1 million barrels a day. China, in particular, has never fully complied with U.S. demands to quit buying Iranian crude and reiterated Monday that its trade with Iran is legal. South Korea, too, might have a hard time replacing the Iranian barrels that fuel its petrochemical industry.
Benchmark oil prices rose almost 3 percent early Monday to just below $74 a barrel.
Saudi Arabia and other OPEC members, along with Russia, have cut back oil production to prop up prices; Riyadh has in fact reduced production much more than it said it would. On paper, that gives the Saudis the ability to ramp up production to offset the loss of Iranian barrels.
“This waiver decision spells the end of OPEC’s supply deal. They can’t hold back 1.2 million barrels every day and make up for a million barrels of Iranian exports,” said Matthew Reed, the vice president at Foreign Reports, an energy consultancy.
Iraq, another key OPEC member, said on Monday that countries should not make unilateral decisions to raise output, insisting that the oil cartel—which will next have its full meeting in June—has to make a group decision.
And even if Saudi Arabia or other big producers do open the taps to offset any loss of Iranian oil exports and keep prices stable, oil markets will remain nervous. For starters, not all oil is equal, and those other countries don’t produce the kind of heavy oil Iran does, which many refiners need. Additionally, Saudi Arabia and OPEC will have less ability to act as a buffer if anything big and unexpected happens to global oil supplies.
“The Saudis, OPEC, and Russia could cover for Iranian oil, but the market will be really tight, and prices will increase significantly, as there will not be much spare capacity left in the market for any potential additional supply interruption,” said Sara Vakhshouri, an Iranian oil expert and president of SVB Energy International, a consultancy.
It’s hardly an idle concern. Renewed heavy fighting in Libya has raised fear among some energy analysts that the country’s million-odd barrels per day of oil production and export could be put at risk. The head of Libya’s U.N.-recognized government said that Trump’s outreach to rebel chief Khalifa Haftar, who earlier in the war grabbed oil depots and is currently attacking Tripoli, could raise the risk of a Libyan supply disruption.
Venezuela’s outlook is even worse. Production for the South American country, which has the world’s largest proven oil reserve, has already plummeted to below 1 million barrels a day amid the country’s widespread political turmoil and economic strife. It will come under further pressure as U.S. sanctions against President Nicolás Maduro’s regime take effect this weekend.
Tougher U.S. sanctions pressure will also further complicate relations with countries from Europe to Asia. Germany, France, and the United Kingdom, with the European Union’s blessing, already set up an alternative financial device to keep doing limited trade with Iran despite sanctions after Trump withdrew from the Iran nuclear pact brokered in part with Europe in 2018. And tensions between Brussels and Washington were rising after the Trump administration last week opted to intensify financial pressure on Cuba, potentially threatening many European businesses.
“The Europeans have been trying really hard to sustain at least a working cooperation with Washington around broader issues of Iran policy,” Maloney, of the Brookings Institution, said. “They have been trying to avoid a full-fledged breach. This will complicate that.”
Turkey, a U.S. NATO ally, is one country that could be hurt by the end of waivers announced Monday. Turkey and Iran have been trying to deepen their bilateral trade, especially in the energy sector, and Ankara has said it is considering its own alternative system to sidestep U.S. sanctions and keep doing business with Tehran.
The end of waivers also raises questions about what China will do. It is the single biggest buyer of Iranian oil and has defied U.S. calls to reduce purchases in the past. But at the same time, Washington and Beijing are close to reaching a preliminary agreement on trade that could scale back commercial tensions that have hurt both economies. Experts believe that China will ultimately value a trade truce more than a few hundred thousand barrels of Iranian oil.
Beyond commercial considerations, the U.S. effort to finally choke off Iranian revenue, coming on the heels of the designation of the Islamic Revolutionary Guard Corps as a terrorist organization, could also prompt a more desperate response from Tehran.
On Monday, Iranian navy officials reiterated previous threats to close the Strait of Hormuz, a maritime chokepoint through which passes about 30 percent of the daily seaborne trade in oil. In February, Iranian ships carried out a major exercise in the strait, including testing new missiles and submarines. Iran’s proxy forces in Yemen, Houthi rebels, have also repeatedly targeted oil tankers transiting another key strait, the Bab el-Mandeb.
While U.S. defense officials and security experts generally dismiss Iran’s periodic threats to close Hormuz and say that U.S. warships would offer a devastating response, an Iranian regime under sustained economic and diplomatic assault could nonetheless ratchet up tensions in a dangerous part of the world.
“If backed into a corner, Iran will look for ways to reduce supply coming out of the region, simply because it helps their bottom line,” Maloney said. She said Iran could exert pressure on Iraq to alter its oil production, or it could target foreign energy companies with cyberattacks to disrupt the market in retaliation for the American decision.
“There’s a lot of potential for inadvertent consequences that no one may have planned or wanted,” Maloney said.
Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP
Robbie Gramer is a diplomacy and national security reporter at Foreign Policy. Twitter: @RobbieGramer