Iran and US Oil Sanctions; What Happened and What Could Happen

The second wave of US economic sanctions against the Islamic Republic, which was supposed to reduce Iran's oil exports to zero, did not achieve its intended goal as of last November. It seems that a combination of domestic political requirements and international relations compelled the US President to lean towards pragmatism and adopt a degree of flexibility in applying pressure on Iran's oil exports. However, this flexible policy does not mean that the Islamic Republic has escaped the 'bulldozer' of US sanctions. The latest data released about the global oil market shows that Iran's oil industry and its export engine, which had managed to breathe again following the implementation of the JCPOA, have once again fallen into decline, and its position in the hierarchy of OPEC has dropped again. On the other hand, the outlook for the US's flexible policy regarding pressure on Iran's oil exports is shrouded in ambiguity, and for the amount of oil that Iran will be able to send to global markets in 2019, only very rough estimates can currently be made. The decline in Iran's position among OPEC producers is evident in the latest monthly report from the Organization of the Petroleum Exporting Countries (OPEC), published on January 17, which indicates that the return of US sanctions has pushed Iran back to fifth place among the member countries of this organization. It is worth recalling that Iran was the second-largest oil producer in OPEC after Saudi Arabia for a long period, which lasted until the beginning of the previous round of international economic sanctions against the Islamic Republic (from 2012 to 2015). The sanctions related to the nuclear issue pushed Iran back to fifth place. After signing the JCPOA and the lifting of pressure on Iran's oil exports, Iran returned to its previous production level of about 3.8 million barrels per day. However, during this time, Iraq significantly increased its production by attracting a large number of international companies, and for this reason, despite recovering its previous production level after signing the JCPOA, Iran could not rise above third place. The January report from OPEC shows that Iran's oil production in December fell under the pressure of the return of US sanctions to 2 million and 769 thousand barrels per day, which is even lower than the production levels of the United Arab Emirates and Kuwait. In other words, Iran is now once again behind Saudi Arabia, Iraq, the UAE, and Kuwait among OPEC producers. Of this production (2 million and 769 thousand barrels per day), how much oil does Iran export? Usually, based on often differing data from the Islamic Republic, about 1 million and 700 thousand barrels of Iran's daily oil production is consumed domestically. If we take this figure as a benchmark, Iran's total oil exports in the last month of the previous calendar year were just over 1 million barrels per day, indicating a significant drop in Iran's oil exports after the return of US sanctions. We see that the US threat to 'reduce Iran's oil exports to zero' has not yet been realized, but the drop in exports to this extent is already a heavy blow to the most important source of foreign currency income for the country. Let us not forget that in the national budget bill for the year 1398, the amount of crude oil exports is set at 1 million and 540 thousand barrels per day. This figure is nearly half a million barrels less than the amount of oil Iran is currently exporting. The outlook for Iran's oil exports in the coming months indicates that Donald Trump's sanctions policy regarding Iranian oil follows two main objectives, which require very complex maneuvers on the international stage to reconcile. The first goal of the US President, as he has repeatedly stated, is to 'reduce Iran's oil exports to zero.' His second goal is to prevent tensions in the international oil market due to the cessation of Iranian oil exports (or a significant part of it). Are these two goals not in conflict with each other? All of the US President's efforts after the onset of the second wave of sanctions against the Islamic Republic last November have been aimed at resolving this conflict. The pragmatism of the White House regarding the imposition of sanctions on Iranian oil exports is within the framework of these efforts. In this context, almost simultaneously with the beginning of the second wave of sanctions, the US, despite its previous threats, allowed eight major importers of Iranian oil (China, India, Japan, South Korea, Turkey, Taiwan, Italy, Greece) to continue buying oil from Iran for six months (until the end of May this year). With this initiative, Washington assured international economic circles that it is attentive to the issue of oil supply and demand and does not want the sanctions on Iran to disrupt this process. On the other hand, with this flexibility, the US reassures the major buyers of Iranian oil, especially China and India, that it does not want to jeopardize their energy security and thus gives them the opportunity to find alternatives to Iran. The pragmatism and flexibility of Donald Trump are primarily related to US domestic policy, which is gradually taking on an electoral atmosphere. Donald Trump is preparing for the 2020 presidential election and knows that his re-election depends primarily on his successes in the economic sphere. One of the most important variables influencing American voters is energy prices, especially gasoline. Given this factor, the current occupant of the White House is unwilling to allow the sanctions on Iranian oil exports to lead to dissatisfaction among American voters due to rising tensions in the energy market. Will the six-month exemptions that the US has granted to eight buyers of Iranian oil be extended? In this regard, contradictory messages are being heard. From American sources, announcements of non-renewal of these exemptions have always been accompanied by a kind of 'but' and 'why,' and it seems they are not completely closing the door on renewal. On the other hand, Reuters reported on January 18, citing analysts, that the exemptions granted by the US will likely be extended for five of the eight countries buying Iranian oil, with only Greece, Italy, and Taiwan being deprived of this privilege. The reality is that no one knows the decision that will be made by the White House in five months regarding the renewal or non-renewal of these exemptions. Two factors can most influence this decision: 1) If the global economy falls into recession, oil demand will decrease, and thus the absence of Iranian oil exports will not be very noticeable. Conversely, a booming global economy will increase oil demand, and in this situation, a further drop in Iranian oil exports could drive up oil prices. To prevent this possibility, the US will be compelled to adopt more flexibility regarding Iranian oil buyers so that a greater shortage is not felt in the market. 2) The cooperation or non-cooperation of Saudi Arabia (and possibly Russia) with the US is also one of the most important factors influencing the White House's decision on whether to renew the exemptions granted to buyers of Iranian oil. If OPEC, led by Riyadh, and non-OPEC, led by Moscow, continue to insist on reducing their production ceiling, the maneuvering space for the US will be narrower. Conversely, Saudi and Russian flexibility could increase oil supply and compensate for the need for Iranian oil.