The US is sanctioning friends and foes that import Iranian oil starting Thursday, but analysts say the White House might find it harder to eliminate Tehran’s energy exports than it expects and Trump administration officials are bracing for Iran’s response.
As the administration ends waivers that allowed eight countries to continue purchasing Iranian crude and condensate, one administration official told CNN that they are concerned about the response from Tehran, which could target US assets in the Middle East and escalate tensions with the US and in the region.
The administration has cut deeply into Iranian oil exports in a very short time, analysts say, and the waiver elimination aims to cut them off completely. US officials are wary, however, that countries will work to find ways around potential sanctions, through smuggling and the use of corporations with little connection to the US financial system.
‘It’s not going to go to zero’
Burgeoning international conflict, competing foreign policy priorities and President Donald Trump’s intense focus on the political impact of gasoline prices could also fray the administration’s attempts to cut Tehran’s estimated daily exports of 1.1 million to 1.3 million barrels a day to a stark zero.
“I don’t think Iranian oil will stop flowing,” said Elizabeth Rosenberg, a former senior adviser at the Treasury Department. While Rosenberg said she expects “a big dip,” she emphasized that “it is not going to go to zero. The US has a major enforcement challenge on its hands.”
In November, the administration gave eight countries waivers to continue their imports of Iranian crude and condensate: China, India, Turkey, South Korea, Japan, Taiwan, Greece and Italy. China, India and Turkey reportedly expected to receive extensions when the waivers expired May 2.
The focus on oil exports is the latest step in the administration’s “maximum pressure” campaign to create change inside Iran – an effort some say is more focused on regime change. The intense US focus on Iran has alienated traditional allies in Europe who have stuck to the Iran nuclear deal that Trump abandoned.
And friction over the US approach to Iran could undermine other foreign policy priorities, analysts say, as the White House works to forge tighter ties with India and reach a trade deal with China. Secretary of State Mike Pompeo left no room for compromise, however, when he made the April 22 announcement, taking energy markets by surprise.
“Today I am announcing that we will no longer grant any exemptions,” Pompeo told reporters that day. “We’re going to zero – going to zero across the board. We will continue to enforce sanctions and monitor compliance. Any nation or entity interacting with Iran should do its diligence and err on the side of caution. The risks are simply not going to be worth the benefits.”
Two days later, Iranian Foreign Minister Javad Zarif pushed back at an Asia Society event in New York. “We believe that Iran will continue to sell its oil,” he said. “We will continue to find buyers for our oil and we will continue to use the Strait of Hormuz as a safe transit passage for the sale of our oil.”
He added a warning. “If the United States takes the crazy measure of trying to prevent us from doing that,” Zarif said, “then it should be prepared for the consequences.”
US security officials have expressed concern that Tehran could respond asymmetrically by targeting US facilities and personnel around the Middle East.
Henry Rome, an analyst with the Eurasia Group, said their view is that Iran isn’t inclined to respond aggressively and instead is hoping to open some form of negotiations with the US or hold out and hope for a successor to Trump.
“If we’re wrong and the Iranians do choose to respond to these oil sanctions in an aggressive way, I think the number one threat is through cyber, whether it’s taking down a Saudi oil refinery or go after banks in the Middle East, I think that’s their most likely route,” Rome said. “It provides them a degree of deniability, there’s less pressure on President Trump to try to respond, so the risk of escalation is relatively lower.”
In the meantime, Iranians are expected to continue smuggling oil, possibly finding routes through Pakistan, Iraq and Afghanistan among other places.
Rome said his group has “baked in 200,000 barrels a day of straight smuggling” – ship to ship smuggling, as well as countries trying to conceal locations of tankers. “There will be Iranian crude reaching the market after May 2,” he said. “It will just be in significantly smaller volumes.”
Compared to the Obama administration, “the Trump administration has taken off more Iranian barrels in a short amount of time with less international cooperation,” said Rome. But he adds that “the manner in which they did that has been, and will continue to be, highly disruptive to international oil markets and to the bilateral relationships with Iran’s main oil importers,” he added.
The potential disruption to oil markets may end up contributing to the difficulty of cutting Iran’s exports.
Production within the OPEC oil cartel has been disrupted by US sanctions on Venezuela, intensifying conflict inside Libya, and a Saudi decision to cut production, analysts said.
Rosenberg said oil market realities are another reason it will be hard to eliminate Iranian oil exports. “I don’t expect it will get to zero, there aren’t enough supplies. … There was not enough notice,” said Rosenberg. “The Saudis don’t have enough, that is not happening.”
Oil prices are an additional wild card, as a slew of factors are already driving domestic US gasoline prices higher – a “red line” for Trump, the Eurasia Group notes – just as Americans start the summer holiday driving season.
And then there’s the question of whether importing countries will cooperate or try to defy Washington.
“We expect South Korea and Japan to comply fully, to zero out,” said Rome.
“We expect China and India to more or less comply” – but not entirely, Rome added.
“The big difference is we expect both countries to continue importing small volumes of Iranian crude, about 300,000 barrels per day between the two of them,” Rome said. “By and large, these countries are more complying than they are defying, but they still do not want to lose face on this and they’re sufficiently incentivized to come up with ways to get around this.”
Both China and India have made substantial investments in Iran and the arrangement is that they get paid in oil, Rome said, predicting that both countries could argue that their continued acceptance of Iranian oil amounts to Tehran’s repayment of a debt and not a contribution to Iran’s coffers.
Some countries have made clear they may resist. China and Turkey, Iran’s biggest customers, reacted furiously to the announcement that the US would move to plug Iran’s energy pipelines.
“We do not accept unilateral sanctions and impositions on how we build our relationship with our neighbors,” Turkish Foreign Minister Mevlut Cavusoglu said in a tweet on April 22, when the US announced its decision. He added that it would undermine regional peace and stability and violated World Trade Organization regulations.
Chinese foreign ministry spokesperson Geng Shuang told reporters on April 22 that his country “opposes the unilateral sanctions and so-called ‘long-arm jurisdictions’ imposed by the US… Our cooperation with Iran is open, transparent, lawful and legitimate, thus it should be respected,” he added.
Rosenberg said that nevertheless, Beijing might seek quiet ways to go around the US, working with smaller companies that aren’t connected to the US financial system.
“Those biggest refiners and firms [who do business with Iran] are going to pull back significantly and smaller traders, smaller refiners, with less exposure to US law enforcement will step in and buy Iranian oil,” she said, pointing to Chinese companies that have served similar functions in the past. “If they are designated or sanctioned as a practical matter it won’t be as significant for them.”