The recent US withdrawal from the international nuclear agreement with Iran and the re-imposition of sanctions are among the most reverberated issues on the international agenda. Washington’s sudden decision to abandon the JCPOA was unilateral, and it was truly alone. What can we expect from the world oil market amidst a possible reduction in global output?
The Iranian nuclear deal, formally called the Joint Comprehensive Plan of Action, was signed in 2015 and was considered one of the top “diplomatic victories” of the Obama administration. The Persian country, which has been a victim of various US and European restrictive measures since its sovereign revolution in 1979, then agreed to close its nuclear program in exchange for lifting restrictive sanctions.
Now in 2018, Donald Trump has moved to fulfill yet another promise from his presidential race – to repress Tehran with restrictions, claiming that the country is a sponsor of terrorism. However, it seems that the only unconditional ally of the White House on this issue is Israel, the irreconcilable rival of the Iranian ayatollahs.
What are the penalties?
In practice, it is not a question of new measures, but the unfreezing of the sanctions suspended in 2015. The US government has decided to carry out the process in two steps so Tehran has time to “improve its behavior.”
Thus, the first part of the sanctions went into effect at midnight (Washington time) from 6 to 7 August. According to the respective package, Iranian public officials are prohibited from buying dollars, while US citizens are barred from acquiring Iranian currency. In addition, trade with Iran is restricted in the following product areas: precious metals, coal, aluminum, steel, graphite, computer technology, automobiles and civil aircraft.
And if this list already raises concern for its size and rigidity, considering the US ultimatum to third countries (“Who is with Iran, is against the US”), the most painful part of the US economic “offensive” against the Persian country begins in three months, that is, on November 5, and affects the most sensitive areas of Iranian production – shipping and shipbuilding, banking and finance and oil sector.
Of course, the main objective of these measures is to isolate Iran from commodity and financial markets. The unspoken end goal of the US establishment is to overthrow the sovereign Iranian government, currently led by President Hassan Rouhani. However, even now, several days after the imposition of the first part of the plan, many doubts about the viability of US expectations are emerging.
The international community’s response
Doubts over the future of Trump’s anti-Iranian project are motivated, first and foremost, by the reaction that followed the North American state’s break with the agreement, even by allied countries. The discontent with such a rebellion from the US administration was expressed by all state signatories of the Joint Comprehensive Plan of Action, who have reiterated their adherence to the terms of the agreement. These include Turkey, some BRICS countries and, in a relatively surprising turn of events, for Europe itself.
But the European authorities have not limited themselves to statements of protest. Less than a day after the sanctions were introduced, they insisted on creating their own mechanism to resist US sanctions against Iran within the European Union. Recall that, according to the Washington project, the sanctions will also affect all countries that continue to cooperate with Tehran.
Although the project is questioned by many critics because of its poor viability and the fact that many European companies have already left the Iranian territory beforehand, it is worth mentioning the very manifestation of such a position. For anyone who is interested in international politics, it is increasingly clear how far the widening gap of discrepancies between Europe and the United States is growing. And the situation does not improve at all with the imposition of US tariffs and Washington’s attempts to decide with whom Europeans can and cannot trade and in which countries they should invest.
At the same time, India, Russia and China, members of the BRICS bloc, are willing to continue buying Iranian oil. According to the opinion of many economists, the main factor here is China’s future strategy, whose oil supply is guaranteed by Iran by more than 10%. Should Beijing follow the line announced and ignore US restrictions, this will largely undermine its effectiveness, while the Chinese government is increasingly inclined to trade in yuan and reduce its dependence on the dollar to zero.
Living under sanctions for decades is not something new for Tehran. Moreover, the Iranian government has always shown great creativity and good adaptation to the conditions of the economic “siege” imposed from outside. Therefore, the effects of of both Trump packages will probably not be shocking.
Among the first precautionary measures, Iran has already announced its adaptation to a floating exchange rate for its national currency, rather than fixed one. In addition, Tehran has spoken about the possible creation of its own cryptocurrency to be present in the financial markets despite all the sanctions, as the Venezuelan government has tried without great success.
However, it must be acknowledged that in a sense the situation within the country has already worsened. Still on the eve of the introduction of the first restrictive package, the value of the Iranian rial fell, prices rose, still aggravated by high permanent unemployment. All this, the experts say, may change people’s opinions about the Rouhani government, following the protests this winter.
The Iranian government has even announced a very serious threat – to close the Strait of Hormuz, the main shipping port for the Persian Gulf countries. However, this seems the last step to be taken by Tehran, since it would mean a near 100% probability of war with the US.
Another prognosis is that Trump might take advantage of the situation and resolve it via the “North Korean scenario”, that is, to appear as negotiator and peacemaker after scathing threats. The US president has even alluded to this on his Twitter account.
However, his Iranian counterpart has dismissed the prospect of a bilateral meeting, noting that Trump has already decided everything beforehand without showing any readiness for consensus.
And the most urgent question remains the same: will the oil market suffer another serious shock if the second package of sanctions is introduced?
Prices will most likely grow, yes, as is already happening, but at much slower rates. This will undoubtedly be advantageous for US shale oil producers. But ordinary people will feel this in the rise in gasoline prices and, consequently, in most supermarket items. So when the American voter feels on his own skin all the costly results of the president’s anti-Iranian policy, will they support him?