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Bolton: U.S. Is Preparing More Sanctions Against Iran

The United States government is…

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The Trojan Horse In Oil Markets

Iran sanctions have been at…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Will Iran’s Oil Exports Fall To Zero?

The deadline for implementation of U.S. sanctions on Iran is just days away, and the Trump administration is having second thoughts about how hard to press the Islamic Republic.

More accurately, there seems to be disagreement from within the Trump administration. According to the Wall Street Journal, Secretary of Treasury Steven Mnuchin is leaning towards a more cautious approach, which would mean refraining from punishing the European Union for its efforts at keeping business ties alive with Tehran.

One of the key issues is the use of Swift, a financial-messaging service that is critical to global finance. Swift helps process international financial payments, and the cooperation of Swift during the prior round of Iran sanctions between 2012 and 2016 was critical in isolating Tehran.

This time around, Europe is resisting the U.S.’ “maximum pressure” campaign. The EU is forbidding European companies from complying with U.S. sanctions, although the measure is mostly toothless.

Nevertheless, top officials from within the Trump administration are at odds over how far to go. “Our objective is to make sure that financial institutions do not process sanctioned transactions,” Mnuchin told the WSJ last week. The Treasury Department is “having very specific discussions with Swift,” Mnuchin said, before adding that “I will use all the tools in my power to make sure that sanctioned transactions do not occur.”

However, Mnuchin is wary of pressing too hard, fearing that it might lead to less help from Europe in regards to Iran. Also, others fear that the hard line will spur Europe and others into seeking an alternative financial architecture that could undermine U.S. dominance over international finance in the long-term. Already, the overuse of sanctions seems to be adding momentum to efforts to use alternative currencies to the U.S. dollar. Related: Iran’s Worst Nightmare Is Coming True

Europe’s effort at building a “special purpose vehicle” (SPV) to help European companies evade U.S. sanctions is evidence of this danger. Recent comments from the French foreign minister hinted at a broader campaign for the SPV to undercut U.S. influence. The SPV is being setup for the sole purpose of skirting Iran sanctions, but it could have broader uses. The SPV “aims to create an economic sovereignty tool for the European Union beyond this one case. It is therefore a long-term plan that will protect European companies in the future from the effect of illegal extraterritorial sanctions,” a spokeswoman for the French foreign minister said.

Meanwhile, Trump’s national security adviser John Bolton, who has long pushed for regime change in Iran, unsurprisingly favors a hardline approach. He wants to sanction Swift and punish banks doing business with Iran.

The internal battle is creating confusion, and the mixed messages are grating on European capitals. “Still waiting for U.S. replies on all these issues,” a senior European diplomat told the WSJ last week. “Zero clarity.” Related: Oil Production On Federal Lands To Hit New Record

November 4 is rapidly approaching, and despite the confusion on what the U.S. will do, the pressure campaign is nevertheless having the effect of curtailing Iran’s oil exports. The Chinese government has reportedly told its state-owned companies not to book purchases from Iran, a surprise move after repeatedly vowing not to comply with American demands. The decision by Beijing is a huge blow to Tehran, and it could translate into more export losses. The WSJ reports that CNPC and Sinopec have not secured any shipments from Iran for November. In September, China imported 600,000 bpd from Iran.

The recent decline in oil prices might provide just a bit more breathing room for countries to cut out Iran, and a bit more leverage to Washington as it seeks to eliminate Iran’s oil exports. “There may not be much need for waivers because [Tehran’s oil buyers] are stopping business with Iran even before sanctions start,” an American official told the WSJ.

However, exports will not fall to zero. India has already booked some shipments from November and is actively seeking a waiver from the United States. Iran will also be able to smuggle shipments and discount cargoes in order to keep the oil flowing to some degree.

Moreover, cutting out the 1.6-1.7 million barrels per day of oil exports from Iran (as of September) entirely would likely tighten the oil market beyond what Washington is comfortable with. As a result, Iran’s oil exports will not fall to zero.

By Nick Cunningham of Oilprice.com

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  • Mamdouh G Salameh on October 31 2018 said:
    The title of your article should have been how big a fiasco will US sanctions on Iran prove?

    US sanctions on Iran are doomed to fail miserably and that Iran will not lose a single barrel from its oil exports. My reasoning has always been based on the following market realities.

    The first reality is that the overwhelming majority of nations of the world are against US sanctions in principle and particularly on Iran as unfair as Iran has not violated the terms of the nuclear deal.

    The second reality is that the petro-yuan has made the US sanctions useless and has provided a way by which Iran could bypass the petrodollar and the sanctions altogether. Even the Swift, the cross-border transaction settlement service, will prove futile as buyers of Iranian crude can pay for their purchases by barter trade, national currency exchange agreements and the petro-yuan.

    The third reality is that China which has been subjected to intrusive US tariffs against its exports to the US and Russia which has been battling harsh US sanctions since 2014 will ensure the failure of the US sanctions against Iran.

    The fourth reality is that China could singlehandedly nullify US sanctions altogether by importing the total Iranian oil exports amounting to 2.2 mbd and paying for them in petro-yuan. China will be more than happy to oblige as a retaliation against US escalating trade war against it particularly if the coming meeting between President Trump and Chinese President Xi Jingping in November fails to produce a breakthrough ending the escalating trade war between them.

    The fifth reality is that 95% of Iranian oil exports go to China (35%), India (33%), the European Union (20%) and Turkey (7%) which have already declared that they are not going to comply with US sanctions. The remaining 5% goes to South Korea and Japan which have already applied for US sanction waivers and they will get them.

    An important pointer is France’s confirmation that the ‘special purpose vehicle’ (SPV) that the European Union (EU) set up to help European companies to do business with Iran while evading US sanctions could also be used more broadly to protect European companies in the future from the effect of illegal US extraterritorial sanctions.

    Claims that China and India are reducing their purchases of Iranian crude oil are total fabrication. On the contrary, China has been increasing its purchases of Iranian crude oil partly because of rising domestic demand and growing refining capacity and partly to spite the United States for its escalating trade war against it.

    India on the other hand is going ahead with its purchases of Iranian crude oil in increasing quantities thus ignoring pressure by the United States to halt these purchases or at least reduce them. India wants to keep importing oil from Iran, because Tehran offers some discounts and incentives for Indian buyers at a time when the Indian government is struggling with higher oil prices and a weakening local currency that additionally weighs on its oil import bill. Moreover, India is reported to be thinking about ditching the US dollar in its trading of oil with Russia, Venezuela, and Iran and paying for its oil imports by barter trade and currency swap agreements or by using the petro-yuan.

    The Iranians, however, may intentionally precipitate an oil shortage in the market by withholding let’s say 1 million barrel a day (mbd) of their exports in order to force the price of oil to rise to $100 a barrel on the knowledge that OPEC, Russia and Saudi Arabia can’t currently add another 1 mbd to the global oil market. In so doing, they will frustrate US sanctions and earn at least as much revenue from exporting less oil.

    Meanwhile, President Trump’s national security adviser John Bolton can whistle in the wind to his heart’s content while Iran’s oil exports continue flowing worldwide unhindered.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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