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The Consequences of Boycotting Iranian Oil

Iran- Strait of Hormuz
An oil tanker is pictured off the Iranian port city of Bandar Abbas, which is the main base of the Islamic republic’s navy and has a strategic position on the Strait of Hormuz. AFP – April 30, 2019. Photo AFP ©AFP ⁃ ATTA KENARE

On May 8, 2018, the United States withdrew unilaterally from the Joint Comprehensive Plan of Action (JCPOA) or Iran nuclear deal. Six months later, on November 5, 2018, the U.S. re-imposed unilateral sanctions on Iranian oil and petrochemical exports. Though it granted waivers to eight nations (including India, Japan and South Korea) that lasted until the end of April 2019 and were aimed at giving them time to adapt to the new sanctions, those waivers were lifted on May 2, 2019 and a total oil embargo went into place. The United States wants to put an end to Iranian oil exports, according to its officials. The aim is to ratchet up the financial and economic pressure on Tehran for the country to capitulate into negotiating on U.S. terms. Iranians currently refuse U.S. Demands, suggesting that Washington is acting in violation of international law and specifically UNSC resolution 2231, which endorsed the JCPOA. Other signatories to the deal back Iran politically, but do not functionally work against the renewed sanctions. Therefore, taking into account Iran’s stated position of no retreat in front of U.S. bullying, let’s have a look at how the oil embargo can affect the U.S.-Iran equation.

As the holder of the fourth oil reserves globally, Iran’s oil plays a big role in its economy and foreign policy. A main part of Iran’s budget is dependent on its oil and petrochemical exports. Reducing this dependency has been an objective of successive Iranian administrations including the current Rouhani administration. The U.S. has targeted both the country’s oil and petrochemical exports with a very strict and unprecedented set of sanctions. Still, while the sanctions are very harmful to their economy, Iranian officials have been vocal about their defiance towards U.S. demands. According to Iran’s Minister of Foreign Affairs, Mohammad Javad Zarif, Iran will sell its oil but it will “never sell its dignity.” In other words, Iran will find ways to circumvent U.S. unilateral sanctions—and by doing so, it won’t kneel before U.S. demands. There are, however, serious doubts in this regard. Those doubts are to be taken into account when analyzing the possibility of a total oil boycott on the one hand, and Iran’s ability to avoid such a boycott on the other.

Before the Islamic Revolution of 1979, Iran exported roughly 6 million barrels per day (mb/d). Iranian revolutionary elites decided to decrease their oil export to minimum as to preserve the natural resource for future generations. Soon after the Revolution, Iran was faced with rounds of sanctions and attacks that targeted its oil production facilities and oil exports. Iraqi air forces targeted Iran’s main oil production facilities during the Iran-Iraq war (1980-1988) and the U.S. targeted four Iranian oil production platforms in the Persian Gulf—which brought down Iran’s production capacity by 520,000 b/d. After the Iran-Iraq war ended, U.S. sanctions on Iran kept going up and down until Washington introduced the crippling sanctions, putting tremendous pressure on Iran’s oil export and its economy more broadly. The first oil embargo in line with this policy was put in place in June 2012. By 2015, Iran’s oil export had therefore dropped to roughly 1 mb/d. The figures started increasing again after the signing of the JCPOA, in July 2015, which lifted the sanctions imposed on Iran’s oil exports. Iran’s production then reached 3.8 mb/d, of which 2.8 mb/d were being exported. China, India, Japan, South Korea, Turkey, and the EU were the main importers of Iranian oil. The figures, however, started going down once again after the U.S. re-introduced its oil sanctions in November 2018, and especially after it stopped the exemptions, or oil waivers, in May 2019.

But how practical is the policy of driving Iranian oil exports figures to zero—if possible at all? There have been encouraging factors for the Trump administration in that regard. Many among Iran’s oil consumers have decreased or even stopped their oil imports from Iran. The OPEC June 2018 agreement to increase oil production, despite Iranian objection, should have been encouraging for Washington as well. As such, Iraq increased its oil production and Saudi Arabia brought in its spare production. Additionally, non-OPEC producers, including Russia and the U.S. Itself, increased their production unprecedentedly. But can the increase of oil production by the abovementioned parties make up for Iranian oil, and more importantly, how can this work towards the U.S.’ Iran policy objectives?

Though oil-shocks were evaded by the increase of OPEC and non-OPEC production to balance Iran’s lack of exports, oil prices are still high and global demand remains robust and rising. OPEC’s spare production capacity is below 3 mb/d, much of which belongs to Saudi Arabia and is already exhausted. On the other hand, global demand rose up by 1.3 mb/d in 2018 compared to 2017 and has gone up by 1.4 mb/d in 2019. A simple calculation tells U.S. policymakers that rising global demand plus the Iranian and Venezuelan shrinking production, as well as the limited spare production both within and without OPEC, means a steady trend of increase in global oil prices. Beyond those global factors, there are also Iranian options that can disturb U.S. oil embargo and its political objectives.

Though limited, Iran’s options seem able to provide the country with the ability to wheather the storm. Its first and obviously pursued option is to try to circumvent the U.S. oil embargo by exporting oil and petrochemical products both officially and unofficially. Though Iranians insist that they will continue to sell their oil, the figures show a return to pre-JCPOA years, when Iran was exporting roughly 1 mb/d. Iranians hope that their traditional consumers, India, Turkey and especially China, will continue to import Iranian oil in defiance of U.S. embargo. Official talks, especially with China, have been encouraging in this regard. However, much of this hope has proved unrealistic. The official figures have dropt to Iran’s record low—below 0.5 mb/d.

Though official oil exports seem disturbing for Tehran, its main bet on circumventing U.S. sanctions is focused on unofficial markets. While the U.S. can trace Iran’s official exports, unofficial, undeclared exports remain ambiguous as they were before the JCPOA. There are rumours —which remain unclear— that the country is unofficially exporting a figure somewhat close to 1 mb/d. And, in parallel with the drop of official oil exports, the figure of unofficial exports is going up, according to sources who spoke to Fanack. Though unofficial oil is sold below global prices, the fact that the U.S. cannot intercept and effectively impede those exports still makes it a rational choice for Tehran under the U.S. oil embargo.

Additionally, fuel smuggling is skyrocketing as a result of the devalued Iranian currency. One liter of fuel in Iran is nowadays sold at roughly $0.08 USD, which is way below prices in neighboring countries. As such, 20 to 40 million liters of fuel is smuggled out of the country on a daily basis. The government is working to stop this trend, because the fuel is obviously state-subsidized. Still, if the government is to add up its subsidies to the prices of smuggled fuel, this could be an ideal path to circumvent U.S. sanctions—something that is already happening, according to sources.

Generally, it is hard —if possible at all— to envisage a situation in which Iran’s oil revenues stop entering the country. In addition to trying to circumvent U.S. sanctions, Tehran has threatened retaliation against U.S. sanctions. Beyond IRGC commander’s usual threats, President Rouhani has stated clearly that Iran “will make the enemy understand that either everyone can use the Strait of Hormuz or no one can,” which is echoed by many other officials. The downing of the U.S. most sophisticated spy drone, Houthis attacks on Saudi Airports and Pipelines on the Red Sea, the growing insecurity after the Fujairah and the oil tankers incidents in the Gulf of Oman and the ongoing uncertainty in terms of Iran-U.S. trade of threats in the Persian Gulf and beyond, paints an accurate picture of the ugly face of continued escalation. Those incidents —that are most probably to continue— can very well translate into shock-effects on oil prices. The Iranian threats were made clear: if Iran is to be suffocated, the global economy will face a real danger. This is of course Iran’s last option, but should be very much effective and annoying to Washington’s strategic community.

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