The Trump Administration has demanded that countries avoid importing oil from Iran and has removed waivers to US sanctions on crude oil imports given to Iran’s largest customers. Many are viewing this as an attempt by the US to pressure the Iranian regime by decreasing the country’s exports to zero.
US President Donald Trump made this decision as a part of the ongoing “maximum pressure” campaign against Iran. There have been widespread reactions to this announcement. What do such measures mean for the global economy? Let’s take a look.
The maximum pressure campaign is a US initiative to cut down on Iran’s sources of income. As crude oil has been one of the biggest exports for Iran, the US decision aims to eliminate all the revenue from this source. “President Donald J. Trump has decided not to reissue Significant Reduction Exceptions (SREs) when they expire in early May. This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue,” said the White House, in a statement.
The US is of the view that Iran uses the funds from its oil exports to engage in destabilising activities in the Middle East and other countries.
During the announcement, US Secretary of State, Mike Pompeo confirmed this by saying, “The goal remains simply: To deprive the outlaw regime of the funds that it has used to destabilise the Middle East for decades and incentivise Iran to behave like a normal country.”
He also added, “With the announcement today, we’ve made clear our seriousness of purpose. We are going to zero. How long we remain there, at zero, depends solely on the Islamic Republic of Iran’s senior leaders. We’ve made our demands very clear to the ayatollah and his cronies.”
The US may see this as a decision for the common good, but several countries have expressed their displeasure regarding this step.
China and Turkey are among the countries that have openly voiced their disapproval of the US decision on waivers.
China’s Foreign Ministry spokesperson, Geng Shuang, was quoted as saying, “China opposes the unilateral sanctions and so-called “long-arm jurisdictions” imposed by the US. Our cooperation with Iran is open, transparent, lawful and legitimate, thus it should be respected.”
The Minister of Foreign Affairs for Turkey, Mevlut Cavusoglu, rejected the sanctions and said they “will not serve regional peace and stability” and will hurt the Iranian people.
As the announcement was made, Brent crude jumped over $74 per barrel to $74.31 in Asian trading. Also, the international oil benchmark rose $1.83 to $73.78. WTI reached to a high of $65.8 per barrel.
Oil prices have seen a sharp rise in 2019, due to voluntary and involuntary cuts by the OPEC, who have tightened supply.
Reduction in Iran’s oil production “is going to make an already tight market even tighter, especially with supply risks in Libya and Venezuela,” said Jason Bordoff, Director of the Center on Global Energy Policy, at Columbia University, in New York.
The companies in those countries that will come under the lens of sanctions will be greatly impacted. They face a threat of being left out of the US financial system, if they don’t stop importing crude oil from Iran.
It needs to be seen whether these companies will seek to avoid the sanctions by importing oil via companies not attached to the US financial system.
Mike Pompeo has said that the UAE and Saudi Arabia have assured the United States that they will ensure there is an “appropriate supply” of crude oil in the market. He also stated that some suppliers are in constant talks with importers of Iranian oil to smoothen the transition from Iranian oil dependence.
Saudi Arabia hasn’t given an explicit guarantee about a change in policy, but they have restated their commitment to balancing supply and demand.
Saudi Arabia’s Energy Minister, Khalid al-Falih, has said, “The Kingdom will coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance.”
Falih also said in a statement, “In the next few weeks, the Kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market, for the benefits of producers and consumers as well as the stability of the world economy.”
After Washington’s official announcement, President Trump tweeted that Saudi Arabia and other OPEC members will “more than make up” for the drop in supply due to the stopping of Iran’s exports.
Iranian officials were quick to condemn this decision and termed the move as “illegal.” The Iranian Foreign Ministry also issued a statement on its official website, stating, “Since the sanctions in question are principally illegal, the Islamic Republic of Iran did not and does not attach any value or credibility to the waivers given to the sanctions.”
The statement also mentioned that Iran had increased its talks with neighbouring countries and “European and international partners” regarding the sanctions. The Ministry concluded by saying that a “necessary decision” will be made later, without giving any specific details.
The pressure on Iran can cause a maritime conflict in the Persian Gulf. In the past as well, Iran had threatened to close down the Strait of Hormuz, the world’s busiest route for seaborne oil shipments, as a counter measure to sanctions on oil exports. Iranian officials reiterated those threats after the US announcement on the waiver of sanctions.
Rear Admiral Ali Reza Tangsiri, commander of the Islamic Revolution Guards Corps, told Al-Alam news channel, “According to international law, the Strait of Hormuz is a marine passageway and if we are barred from using it, we will shut it down. In case of any threat, we will have not even an iota of doubt to protect and defend the Iranian waters.”
It seems like a volatile time ahead for the oil markets, which would then have a roll-on effect on a number of other financial markets as well, including forex.