President Donald Trump sacked Secretary of State Rex Tillerson via Twitter on Tuesday, replacing him with current CIA Director Mike Pompeo. The move has some grim implications for the U.S.’ approach towards Iran in the months ahead.
Sec. of State Rex Tillerson has been panned as “at or near the bottom of the list of secretaries of state, not just in the post-Second World War world but in the record of US secretaries of state,” according to Paul Musgrave, a scholar of US foreign policy at the University of Massachusetts Amherst. Other foreign policy scholars came to the same conclusion. Tillerson presided over a dismantling of the U.S. diplomatic corps – upwards of 60 percent of the agency’s top career diplomats resigned – and will exit Foggy Bottom without any notable accomplishments.
But, the dismal tenure for Tillerson could be followed by an even darker period in which the U.S. steps up confrontation on multiple fronts around the world. For all his faults, Tillerson, at least by comparison, was viewed as a relative moderate. He will be replaced by the current CIA Director Mike Pompeo, a notorious hawk who has politicized the CIA to great degree.
And one of Pompeo’s top targets could be Iran. Pompeo has previously called for tearing up the 2015 Iran nuclear deal. “Pompeo has done nothing but talk about how we need to take the gloves off,” Stephen M. Walt, a professor of international relations at Harvard’s Kennedy School, told the New York Times. Indeed, the NYT notes that just days after Trump was elected, Pompeo wrote in Twitter, “I look forward to rolling back this disastrous deal with the world’s largest state sponsor of terrorism.”
Pompeo has repeatedly signaled support for a harder line, whereas Tillerson appeared to be one of the few figures holding the administration back from taking aggressive action on Iran and North Korea.
As such, heightened confrontation or outright conflict with Iran appears more likely. Related: This Oil Major Just Invested In Nuclear Fusion Energy
The President has to periodically recertify that Iran is complying with the terms of the deal, waiving U.S. sanctions for several months. Trump has done this several times, begrudgingly, in part due to Tillerson’s persuasion. With Tillerson out and Pompeo in, all signs pointing to the U.S. trying to rip up the agreement when the next recertification deadline arrives in May.
In fact, Trump explicitly said on Tuesday that one of the reasons for Tillerson’s removal was because of their disagreement over the Iran deal. "If you look at the Iran deal I think it's terrible and I guess he thought it was OK … We weren't really thinking the same," Trump said in a statement outside the White House on March 13.
So, what does all of this mean for the oil markets? A recent study from Columbia University’s Center on Global Energy Policy looked at some potential scenarios. The report estimated that Iran could lose around 400,000 to 500,000 bpd in the first year after U.S. sanctions targeting Iranian oil purchases returned. That number would rise to about 600,000 bpd if the U.S. managed to bring China, India or Turkey on board, the report says.
However, the Trump administration will have difficulty lining up support from key allies and other international partners, and not just because it is burning bridges at a torrid pace (see: steel tariffs, Paris Climate Agreement). By all accounts, there is little evidence that Iran is breaking the terms of the deal, and by walking away, the U.S. looks like the one breaching the contract, not the other way around. Related: Glut Or Deficit: Where Are Oil Markets Headed?
Even as the U.S. appears more likely to walk away from the Iran deal, there are still a lot of uncertainties that remain. There are multiple sanctions upon which the Trump administration has to make decisions. The international reaction will also present new challenges. It is unclear how Iran might respond. As it relates to oil, the Columbia University report notes that what constitutes “crude oil” is somewhat subjective, so it remains to be seen how Iranian oil exports are affected by specific U.S. actions.
The upshot is that firing Rex Tillerson and replacing him with an Iran hawk does not bode well for the longevity of the Iran nuclear deal. That presents new threats to Iran’s oil supply, with a potential outage of half a million barrels per day possible if the U.S. decides to go down the road of confrontation.
By Nick Cunningham of Oilprice.com
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Depending on how long a conventional war lasts, and whether or not the Iranians mine the Persian Gulf, will determine if the price of oil goes high enough to wreck the global economy.
The amount of debt everywhere means it won't take much to pop the debt bubble and collapse the banks.
President Trump thinks he can impose his will on the world and get away with it. He is absolutely wrong. He is losing allies and credibility around the world. His possible withdrawal from the Iran’s nuclear deal will no doubt please Israel but it will also jeopardize US national interests greatly.
And contrary to Columbia University’s study claiming Iran would lose around 400,000 to 500,000 barrels a day (b/d) from new US sanctions, Iran will not lose a single barrel of oil. Moreover, the United States will never manage to bring China, India or Turkey on board.
In the past the sanctions against Iran’s oil exports worked because the US threatened to impose sanctions on banks dealing with Iran and the European Union (EU) threatened sanctions against insurance companies insuring Iran’s cargos of oil exports.
The EU is not going to reintroduce sanctions on Iran since Iran has not violated the nuclear agreement. As for threatened US sanctions on banks dealing with Iran, Iran was using the Chinese yuan as payment for its oil exports to China even under the sanctions. It also bartered it oil shipments for goods imported from India. And since most of the oil exports went to China, it seems to me very logical that Iran will now opt to for the soon-to-be-launched petro-yuan whether President Trump renews the sanctions against it or not.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London