U.S. President-elect Donald Trump has vowed to rip up the Iranian nuclear agreement on Day 1, and reimpose sanctions on Iran. The move could potentially have far-reaching consequences for the oil markets.
The 2015 deal between the P5+1 nations (U.S., France, the UK, Russia, China and Germany) and Iran was one of the signature achievements of the Obama administration, one that produced multiple benefits. First, it ratcheted down tensions between Iran and the U.S., a relationship that had become so hostile in the preceding years that the drumbeats of war were audible in Washington. Second, the agreement put restraints on Iran’s nuclear program. From Iran’s perspective, the deal also paved the way for a return to international markets, and allowed them to ramp up oil production and exports. All told, Iranian oil exports had dropped from 2.4 million barrels per day (mb/d) in 2011 to just 1 mb/d by 2013. Iran has since restored much of that lost output.
However, the historic thaw in relations became a lot more complicated with the election of Donald Trump, who has vowed to take a hardline with Tehran. It is not clear that the mercurial President-elect will follow through on his threat (or a long list of other campaign promises), or back off once he sits in the Oval Office and takes a harder look at the agreement.
If he does follow through on killing the accord, the fallout could be significant. It is unclear how effective it will be to unilaterally re-impose sanctions on Iran. Considering the size of the U.S. economy, threatening to close off access to the American market to anyone purchasing Iranian oil could be persuasive. That could potentially cut off some Iranian oil exports once again, which would have the effect of taking global supplies off the market, thus pushing up prices. Related: Is Iraq Coming Back To The OPEC Deal?
On the other hand, as a new report from Columbia University’s Center on Global Energy Policy details, the restoration of sanctions might have a more nuanced outcome. It would likely be met with dismay across the globe, including from U.S. allies that worked hard to reach an accord. Some countries, including American allies in Europe and Asia could reject the Trump administration’s demands. As such, oil flows would be rerouted from countries that comply with Washington’s demands and put sanctions back in place to countries that refuse to comply. If a large oil purchaser, such as China, decides not to cooperate with President Trump, the U.S. effort to contain Iran will likely fail.
The Columbia University report also offers some interesting theories on Iran’s calculus regarding cooperation with OPEC if the U.S. tears up the nuclear accord. On the one hand, Iran might decide to cooperate with OPEC in order to boost oil prices now, thus making it more painful for the international community to restore sanctions because it would have the effect of further pushing up oil prices. The flip side is that Iran might try to produce as much as possible today for fear of seeing output curtailed by international sanctions in the future.
For oil prices, the effect of a more confrontational approach would be bullish, to say the least. The potential for supply outages would rise. But the geopolitical risk premium would arguably be more important. Tearing up the nuclear accord would leave moderate Iranian officials in the lurch, many of whom took a great deal of risk to support negotiations with the U.S. Hardliners would thus be strengthened, and conflict between Washington and Tehran would be hard to undo.
Of course, for many in the Trump administration, there is plenty of upside from this. Donald Trump has tried to curry domestic political support by taking an aggressive position towards Iran. Meanwhile, several rumored appointments in the Trump administration have a long history of advocating for a hostile approach towards Iran. Related: U.S. LNG Is Changing The Global Gas Game
Congressman Mike Pompeo has been appointed to lead the CIA promised to “roll back” the nuclear deal as recently as last week. The hawkish National Security Advisor Retired Army Lt. General Michael Flynn is also a critic of the deal. Most important of all is probably the potential selection of John Bolton to lead the State Department. Bolton is one of the most extreme critics of the Iranian nuclear deal and Iran in general, and he openly called for regime change in Tehran just a few days ago. Should he be selected to lead the State Department, Trump will likely have telegraphed his intentions to scrap the landmark deal.
Then there are the top executives from the oil industry that have the President-elect’s ear. They would stand to benefit from the spike in oil prices if Iranian oil was forced out of the market. The Columbia University report estimates that U.S. shale would see an increase in output of 300,000 to 900,000 barrels per day in the next few years if oil prices rise to $60 per barrel. It is not hard to imagine oil prices rising that high if the U.S. openly tries to isolate OPEC’s third largest producer.
Of course, when dealing with Donald Trump, it is impossible to make accurate predictions. We may have to wait until January to find out what he will do.
By Nick Cunningham of Oilprice.com
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Suppose Putin decides to start shipping sophisticated missiles to Iran, telling them they can pay him whenever they get the money. People should remember that Russia can exist without a drop of imported oil or gas. He would enjoy watching the US get involved in a very expensive war in the Middle East, and for US drivers to have to wait for expensive, rationed gasoline. The more damage in the Middle East, the more valuable Putin's oil becomes. Trump's son in law might want to tell him that his fellow Jews in Israel probably wouldn't enjoy SCUDS raining down on those fancy skyscrapers in Tel Aviv. Don't poke a hornet's nest. Let sleeping dogs lie.
Suppose we take out their enrichment because they already violated the phony treaty. Suppose we take out their navy the next time they give us an excuse- that would take about one day and there would be no mines. Suppose we took out their missiles and aircraft with drones- that would be day 2. Suppose Israel invades Lebanon like they have before to stop terrorists.
Suppose after we did all this, Russia and China did nothing- because they wouldn't dare. Two days to undo the mess that Clinton and Obummer made. Not bad.
I guess we know who the author of this article voted for! He thinks there is a reduction in aggression from Iran!
And on day 3 of this scenario, what do you SUPPOSE the price of oil would be? Hint: If you could get it for $100 dollars/B you would have scored big.
The idea that we can, by military force, impose our will on the world is naive. The unintended consequences of what you propose would crash the world economy over night. It was a heavy lift getting the sanctions and then the Iran deal agreed among the six parties. Whether you think it was a good deal or not, if we tear it up they have every reason to sabotage anything we put forward in world politics. If you think China has been a little unruly lately, everything up to now would be as nothing compared to what would follow. For starters, China would gladly buy all the oil Iran wants to sell. Sanctions from the US would be meaningless. Or are you proposing that we also bomb the legal trade of oil between Iran and China (legal since there would be no sanctions, just the US impotently shouting "don't buy Iran's oil")? Putin would be like a kid on Christmas morning because we would have isolated and weakened ourselves by our own actions.
Economically you are talking about a crash unrivaled in human history. Militarily you are talking a very real possibility of WW3. Either way (or both), it would not end well. There would be NO victors.