WhatScrappingtheIranDealWouldMeanforOilMarkets
ByJasonBordoffandRichardNephew
November21,2016
OPECAwakens
MembersoftheOrganizationofPetroleumExportingCountries(OPEC)meetNovember30inVienna
andhavebeennegotiatinginadvanceofthismeetinginearnesttoreachanagreementtocurb
productionandboostoilprices.SaudiArabia,whichshowedlittleinterestinmanagingthemarket
followingtheinitialoilpricecollapseinlate2014,haschangedcourse,andseemseagertoreachadeal.
InlateSeptember,OPECnationsagreedtoreduceoutputtoacollectivelevelof32.5to33million
barrelsperday(b/d).Atthetime,OPECproductionwas33.2millionb/d,buthassincerisento33.6
millionb/dinOctoberbyitsownestimate.
Severalstickingpointstoadealremain.AmongthemostdifficultisIran’sparticipation.Atthemeeting
inSeptember,itwasagreedthatIranwouldbeaskedtofreezeproduction,althoughthelevelatwhichit
willfreezeisundernegotiation.SaudiArabiahassaiditwantstoIrantofreezeat“currentproduction
levels”,whileIranhasbeenpushingforalevelof4millionb/dorhigher.IranreportedtoOPEClast
weekthatitproduced3.9millionb/dinOctober,althoughsecondarysourcesputthefigureat3.7
millionb/d.
TheReturnofSanctions?
ComplicatingtheoutlookistheelectionofDonaldTrumpasPresidentoftheUnitedStates.Trumphas
suggestedthatheopposestheIrannucleardeal–orJointComprehensivePlanofAction(JCPOA)asitis
formallyknown—andintendstorenegotiateit.Hehasarguedbothforarenegotiationthatpermits
greaterU.S.economicaccesstoIranandformoreseveretermsforIran’snuclearprogram.Itislikely,
thoughnotcertain,thatthedemandformorestringenttermswillbethefocusofhisagenda,withIran
facingthechoicebetweenconcedingevermorenuclearactivitiesandrightsandlosingthesanctions
reliefconveyedintheJCPOA.Asoneofushasarguedpreviously,renegotiatingtheIrandealwillprove
farmoredifficultthanTrumpmayanticipate.
WeretheJCPOAtofallapart,itwouldmeantherestartoftheU.S.sanctionseffort.TheTrump
Administrationwouldgettodecidewhatsanctionsmeasurestorelaunchbutwouldalmostcertainly
reimposesanctionsonthepurchaseofIranianoil,akeypartofthepre-JCPOAsanctionsregimethatis
stillonthebooksbutwaivedwhiletheJCPOAisinforce.Thelawsetsupasimplechoice:countries
purchasingIranianoilmustreducetheirpurchasesbyasignificantamounteverysixmonthsorseetheir
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companiesandbanksassociatedwiththeoiltradebedeniedaccesstoU.S.markets.Formajorbanks
andoilcompanies,suchathreatcouldbetheequivalentofadeathsentence.
InNovember2013,thesesanctionswereputonhold,withthecompletionoftheinitialJointPlanof
Action(JPOA),anagreementbetweenIran,theUnitedStates,andU.S.negotiatingpartnersintheP5+1
(which,inadditiontotheUnitedStates,includedChina,France,Germany,Russia,andtheUnited
Kingdom).Whenthefollow-onJCPOAwasimplementedinJanuary2016,thesesanctionswerereversed,
allowingIrantosellhowevermuchoilitwishedtowhomeveritwishedandtoreceivetherevenues
fromthesesales.
Priortothat,from2011to2013,theUnitedStatesrequiredbuyersofIranianoiltoreducetheir
purchasesby20percenteverysixmonths.Inotherwords,forcountriesstillpurchasingIranianoilin
2013,theywouldhavehadtobuyroughly60%lessoilbythatpointthantheydidin2011.
TheU.S.sanctionsresultedinareductionofIranianoilexportsfromaround2.4millionbarrelsperday
(bpd)in2011tojustunder1millionbpdin2013.U.S.sanctionsalsotargetedtheshippersofIranianoil,
insurersofIranianoil,andbanksthatholdtherevenuesfromIranianoil.Thiscampaigndemonstrated
thestrengthoftheU.S.abilitytoinfluenceforeigneconomicdecisionsbyleveragingaccesstotheU.S.
economy,andwasresponsiblefordeprivingIranofaccesstosome$50billioninoilrevenueduringthat
time.Opponentsofthenucleardeal–andTrumphimself–maybelievethattheycanequalorbetter
thesuccessofthiscampaign.
EveniftheOPECdealcollapses,therefore,itispossiblethatthereimpositionofU.S.sanctionsagainst
IranwouldstillpulllargevolumesofOPECoiloffthemarketfromIran,withsignificantconsequencesfor
theoilmarket.
Realitiesofsanctionsreimposition
TheextenttowhichreimposingsanctionswouldpullIranianoiloffthemarketmustbeconsideredin
thecontextoftoday’scircumstances.In2011-2013,theUnitedStateshadacompellingstorytogoalong
withitssanctions,offeringtoenterintoconstructivenegotiationsonadiplomaticoutcometothe
Iraniannuclearproblem.IfTrumpweretoreimposesanctions,hewoulddosoinaninternational
environmentthatisdeeplyskepticalofhispresidencyandwhichmaybegreatlyperturbedbyhis
reversalofanucleararrangementthatmostworldcapitalsendorseandsupport.Itisunclearwhether
foreigngovernments,muchlessforeigncompaniesandbanks,willcooperatewiththeU.S.sanctions
strategy.
SomemaygoalongwiththeUnitedStatesandreducetheirpurchasesofIraniancrude.JapanandSouth
Korea,forexample,mayfearforthefutureoftheU.S.allianceinaTrumpAdministrationthatseems
decidedlyhostiletoalliesnotseenaspayingtheirfairshare(aspuriouscharge,butnonethelessone
Trumphasmade).EuropemayalsochoosetoworkwiththeTrumpAdministrationformuchthesame
reason.Othercountriescouldbemotivatedbythethreatofhavingtheircompaniesandbanksdenied
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accesstotheUnitedStates,literallytheabilitytodobusinesswithU.S.companiesandbanks,operatein
theUnitedStatesandusetheU.S.dollar.
Ontheotherhand,it’salsopossibletogenerateanalternativescenario.Forexample,Japan,South
Korea,andEuropemaychoosetopushbackontheTrumpAdministration,underscoringboththeirown
energysecurityneedsandtheirrefusaltopermittheUnitedStatestowrecktheJCPOA,viewedbythese
countriesasasignificantachievementforinternationalsecurity.Europehas,inthepast,foughtU.S.
sanctionslegislation,includingthroughthreatenedsuitsattheWorldTradeOrganization.Likewise,
JapanandSouthKoreamaylooktoChinatoseewhetheritdecidestocooperate,whichseemsunlikely
bothbecauseChinawasarecalcitrantsanctionspartnerpreviously,andoutoffrustrationfortheoverall
tenorofTrump’sapproachtotradeandeconomiccooperationwithChina.Similarly,TurkeyandIndia–
othermajorimportersofIranianoil–couldbedifficultpartnersinarenewedsanctionseffort.
Fromanoilmarketstandpoint,sanctionscooperationwasmadeeasierpreviouslybythedramaticrisein
U.S.oilproductionthatmorethanoffsetthelossofIraniansupply.U.S.oilproductionrosefrom6.1
millionb/dinJanuary2012toapeakof9.7millionb/dinApril2015.WhileU.S.productionhasfallento
8.7millionb/d,itcouldrisequicklyagainifoilpricesgetaboostfromnewsanctionsagainstIranian
supplyorforotherreasons.TheDallasFederalReserveestimatesthatthebreakevencostofUSshale
hasfallenfrom$79perbarrelin2014to$53today.Andvariousprojectionsfindthatatanoilpriceof
$60perbarrel,U.S.supplycouldgrowbetween300,000and900,000b/dannuallyinthenextfew
years.Additionally,theglobalmarketisalsocurrentlyoversuppliedandhasveryhighlevelsofinventory,
makingiteasierforbuyersofIraniancrudetofindalternativesourcesofsupply.
Atthesametime,theoilmarketisglobal.IfcertaincountriescomplywithnewsanctionsagainstIran,
butothersdonot,itwouldmerelyshiftoilflows,sothatIraniansalesarereroutedtocountriesthat
choosetoignorenewunilateralU.S.sanctions-makingitmoredifficultforthosethatadhereto
sanctions,whileprovidingbetteraccessforthosethatdonot.Moreover,Europepreviouslyreducedits
purchasesofIranianoilfromaround600,000b/dtozerobecauseit,too,imposedsanctions.Thistime,
itmaynotdoso–obtainingtheconsensussupportof28EUmemberswouldbedifficultatbest–andit
isinsteadmorelikelythatindividualEuropeancompaniesandcountrieswouldgraduallyreduce
purchasestocomplywithU.S.sanctions,followingthepathofcountrieslikeKoreaandJapan,andthus
reducingtheimpactofsanctionsonIranianoutputthistimearound.Theremayalsobealargeblack
marketinIranoilpurchases,especiallyifalargeconsumerlikeChinadecidesnottocomply.
OPECnow
TheotherquestiontoconsideriswhatthepossiblereimpositionofsanctionsagainstIrandoestoIran’s
negotiatingposturewithinOPEC.IsIranmoreorlessinclinedtostrikeadealandfreezeatlevels
acceptabletoSaudiArabiabecausetheU.S.maysoonreimposesanctionsagainstIranianoilsales?
Ontheonehand,IranmaywishtofreezeoutputtoshoreupsupportwithinOPECandgetpricesupto
earnasmuchrevenueastheycanwhiletheystillcan.Iranmayalsobelessconcernedaboutdeterring
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foreignupstreaminvestmentbyfreezingoutputifitbelievessanctionsmaysoonbereimposed.Most
importantly,Iranhaslikelyincreaseditsoutputasmuchasitcaninthenearterm,andgettingan
agreementisinIran’sinterestnotonlytomaximizerevenue,butalsotomakemarketstighterandthus
makebuyersofIraniancrudelesswillingtogoalongwithnewU.S.sanctions.
Ontheotherhand,Iranmaywishtorunupitsoutputifitfearsitmaysoonbeisolated,needtofind
newbuyers,andneedselloiltocountriesthatviolateU.S.sanctionsatadiscount.
Conclusion
EvenifOPECcan’treachanagreementtocutproduction,theU.S.maybeabouttodosomeofthat
workforthembysanctioningIranianoilsalesagain,andthuspushingupoilpricesifothernationsagain
significantlyreducetheirpurchasesofIranianoilinresponsetodiplomacyandthethreatofsanctions.
Butthatisfarfromcertain,andtherearemanymorereasonstobeskepticaltodaythanintheprior
2011-2013periodthatmostorallbuyersofIraniancrudewillcomplyandthusforceasharpreduction
inIranianoilexports.TotheextentpullingIranianoilofftheglobalmarketagainforcesupprices,U.S.
shaleisalsopoisedtorapidlygrowitsproduction,thusactingasanewlimitonhowfarpricescanrisein
responsetoproductioncutscausedbyanOPECagreement,sanctionsoranyotherreason.Beyondthe
oilmarketimpacts,unravelingtheIrandealwouldbolsterthepositionofthehardlinersinIran,
reinforcetheperceptionthatreformistsweredupedbyAmericansactinginbadfaith,andsetbackthe
potentialforfurtherpoliticalmoderationinIran–aswellasanychanceofarenewednucleardeal–for
manyyears.
JasonBordoff,aformerenergyadvisertoPresidentObama,isaprofessorofprofessionalpracticein
internationalandpublicaffairsandfoundingdirectoroftheCenteronGlobalEnergyPolicyatColumbia
University.RichardNephew,formerPrincipalDeputyCoordinatorforSanctionsPolicyattheDepartment
ofState,isprogramdirector,EconomicStatecraft,SanctionsandEnergyMarketsattheCenteronGlobal
EnergyPolicy.
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