The United States is upping the ante in its effort to sanction Iran, and its efforts may further complicate its ongoing trade war with China and affect the flow of oil worldwide.
On August 16, the head of the new Iran Action Group, Brian Hook, announced that the U.S. would sanction any country that purchased oil from Iran after the November 4 deadline. China has shown no indication that it plans to cooperate with the U.S., and Hook did not rule out imposing secondary sanctions on China if it continues its purchases of Iranian oil.
While other importers of Iranian crude, including Japan and South Korea, had scaled back their purchases, China has actually increased its imports from Iran.
In August China announced a round of tariffs on U.S. goods, including some oil products, though it exempted U.S. crude from the list.
Nevertheless, Chinese imports of U.S. energy products has been on the decline. A ship-tracking report noted that not a single U.S. tanker has departed for China in August. Should the U.S.-Chinese trade war worsen, China may turn towards alternative sources of energy, including Russia or Iran. That would be a real blow to U.S. energy suppliers like Cheniere Energy Inc., which ships LNG to China.
China is the second-largest market for U.S. energy goods. In May it averaged 427,000 bpd of U.S. imports, surpassing Canada, which imported 289,000 bpd, according to the EIA.
Right now, Chinese importers like Unipec have adopted a “wait and see” attitude towards buying US crude, despite the fact that it was left off the Chinese government’s tariff list.
For China, the situation may involve choosing between Iran and the U.S. American energy products have been attractive for Chinese importers, but the geopolitical advantages of cozying up to Tehran may outweigh the economic benefits of sticking with U.S. crude. Related: The One Oil Industry That Isn’t Under Threat
The U.S. decision to withdraw from the 2015 nuclear deal and adopt a more aggressive policy towards Iran, one that may be aimed at toppling the Islamic Republic and replacing it with a new government, has altered the geopolitical calculus. The European Union, which signed the nuclear deal, has been attempting to maintain ties with Iran and shield it from U.S. sanctions. They’re hoping to preserve the agreement, as Iran is still complying with its terms.
But European efforts will likely end in failure. European businesses like Total SA have been cutting ties with Iran before sanctions kick back in on November 4. It simply isn’t worth it to invest in Iran if it means losing access to the United States and the largest economy on earth, particularly at a time when the US government is using economic sanctions, tariffs and other protectionist measures for political ends.
As Europe draws away from Iran, China and Russia are likely to slip into the void, investing more in Iranian crude and buying more Iranian exports.
Some analysts have predicted Chinese purchases of Iranian crude could increase after sanctions snap back in November. China is Iran’s biggest customer and already accounts for 35 percent of Iran’s exports. As South Korea and Japan begin to reduce their purchases and India, another big purchaser, trying to maneuver between the two sides, the opportunity for China to grow closer to Iran and take advantage of the open supply could be too great to pass up. Related: Trade War May Push China To Russian Energy
The Iranian government will be hard-pressed to pass up Chinese help. Iran’s currency has plummeted, internal dissent has spiked, and a new U.S. sanctions regime will make the situation even worse. China, by choosing to ignore U.S. sanctions and decrease its purchases of U.S. oil, is sending a fairly clear signal: it won’t be coerced into cooperating with the U.S. policy and is willing to help Iran, provided it gets something in return. For two countries that have grown closer in recent years, the changing situation is likely to promote stronger ties and stiffen Iran’s resolve to resist the U.S.
Iran and China, along with Russia and Turkey, are drawing closer due to the intertwined issues of geopolitics and energy. As U.S. pressure on Iran mounts and the international oil supply situation tightens, it’s likely that these ties will grow even stronger in coming months.
This calls the efficacy of the U.S. strategy to pressure Iran (and perhaps facilitate regime change) into question: new sanctions could only push Iran further into the arms of China, pushing Chinese purchasers away from U.S. energy exports and setting back U.S. ambitions of “energy dominance.”
By Gregory Brew for Oilprice.com
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My reasoning is based on five market realities. The first is that the overwhelming majority of nations of the world including US allies and major buyers of Iranian crude are against the principle of sanctions on Iran as unfair and will not therefore comply with them and will continue to buy Iranian crude whether in violation of the sanctions or by a US waiver as would be the case with Japan, South Korea and Taiwan.
The second is the petro-yuan which has virtually nullified the effectiveness of US sanctions and provided an alternative way to bypass the sanctions and petrodollar.
A third reality is that China which is being subjected to intrusive US tariffs and Russia which has been battling US sanctions since 2014 will ensure the failure of US sanctions against Iran as a sort of retaliation against US tariffs and sanctions against them.
A fourth reality is that China can singlehandedly neutralize US sanctions altogether by deciding to buy the entire Iranian oil exports amounting to 2.5 million barrels of oil a day (mbd) as a retaliation against escalating US trade war against it and paying for them in petrodollar.
A fifth reality is that 95% of Iran’s oil exports go to countries who declared that they will not comply by US sanctions, namely China (35%), India (33%), the European Union (20%) and Turkey (7%). The remaining 5% of Iran’s oil exports go to South Korea and Japan who have already said they will apply for a US waiver and most probably they will get.
It is becoming farcical that the head of the New Iran Action Group, Brian Hook, is threatening to sanction any country that purchased Iranian crude after the November 4 deadline. First, the United States doesn’t have extraterritorial jurisdiction over other countries of the world to expect full compliance by them of the US sanctions on Iran. The overwhelming majority of the nations of the world will simply ignore the sanctions. Second, China is not Djibouti to be threatened by the likes of Mr Hook. It is the world’s largest economy and a superpower in its own right. China is going ahead with buying Iranian crude thus ignoring US sanctions on Iran and daring the United States to impose sanctions on it.
Were the US to impose sanctions on China, China could easily switch to other markets around the globe. China’s economy is far more integrated in the global trade system than the US economy and also bigger by 24%. However, the US could pay a heavy price if it tries to replace Chinese exports with imports from other countries. No other country in the world could produce goods particularly high tech goods cheaper than China. Replacing Chinese exports will lead to higher prices for US customers and also higher inflation in the United States. This will definitely offset any benefits from the tax cuts, worsen US budget deficit and increase US outstanding debts by an estimated 2.35%. Furthermore, China’s purchases of US shale/tight oil and LNG could come to an end. These will be easily and happily replaced by Iranian crude and Russian LNG respectively.
The European Union (EU) has affirmed that it will not comply with US sanctions and will continue to deal with Iran and purchase Iranian crude.
India will never halt its imports of Iranian crude no matter what pressure the United States puts on it. India announced that it doesn’t recognize any sanctions but UN sanctions and that it will ignore US sanctions on Iran and continue to import Iranian crude. In June 2018 India imported 705,000 b/d of Iranian crude compared with 464,000 b/d in June 2017. This is not the action of a country planning to comply with US sanctions on Iran.
The US Administration’s claim that it will be able to persuade Iran’s oil customers to cut their crude imports from Tehran by as much as 1 mbd is more of self-delusion and wishful thinking coming from an administration that has antagonized virtually everybody including its own close allies.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London