Climate change is a GOP issue, too
Return of Iran sanctions work against Trump's oil objectives
The Trump administration has announced a zero-tolerance policy for its unilateral sanctions on Iranian oil exports. Waivers provided for eight countries will not be extended beyond the May 2 deadline.
This could be "deja vu all over again" or a dramatic new stage in sanctions enforcement and geopolitics in the Middle East and beyond.
President Donald Trump made a similar announcement last Fall but then granted waivers to China, Japan, South Korea, India, Turkey, Taiwan, Greece and Italy. Oil markets shot up and dropped back in reaction to the shifting news.
Predictably, oil markets surged this week with the imminent deadline and the administration's announcement. The prospect of possibly more than 1 million barrels per day being withdrawn from the market had an immediate impact.
Even though that's only about 1 percent of global trading, oil is subject to the leverage of commodity markets where small surpluses or shortages have outsized impacts.
President Trump has created a conundrum for himself and oil markets. For several months, he has jawboned Saudi Arabia to increase production in order to lower gasoline prices for American consumers. At the same time, he has issued permits, executive orders and regulatory changes to eliminate bottlenecks and increase U.S. production.
But by pressing aggressive sanctions on Venezuela and Iran, he has worked at cross purposes to that goal. These actions tend to move prices for crude, and ultimately gasoline, upward. They put pressure on stable oil markets and, in the case of Venezuela, challenge refining operations in the U.S.
Can Trump achieve his dual goals of slashing revenues for the Islamic Republic while protecting American consumers from a price hike as dozens of candidates seek to replace him? The drawn out "yellow vest" protests in France are not lost on him. And can he do it without unleashing raw, latent resentment around the world?
The key questions are how the impacted importing countries will react, which exporting countries will cover the shortfall in the near future and the extent of unexpected consequences.
While some of the initial responses were muffled, China was more assertive, adding market anxieties atop a combustible pile of trade disputes with the U.S. A Chinese spokesperson asserted that their trade with Iran is legal and longstanding, calling the actions "the long arm jurisdictions imposed by the U.S."
This was an echo of the original Iran-Libya sanctions imposed unilaterally by the U.S. in 1996. At that time, much of the reaction came from European allies. Those old wounds were reopened in recent months by the U.S. withdrawal from the Joint Comprehensive Plan of Action on Iran.
Bankers have learned the hard way to honor these sanctions, especially after Standard Chartered Bank recently agreed to pay a $1.1 billion fine for violations of Iranian sanctions.
Actions like these often have unintended consequences. One possibility is that the U.S. and the Organization of Petroleum Exporting Countries (OPEC) may find themselves in a race to meet any shortfall, which could break recent production accords and drive oil prices sharply downward.
It could also stimulate cheating. The Iranian Revolutionary Guards Corps (IRGC) has profited from smuggling in recent years, and it may see an opportunity in the current situation.
The "dark market" for oil could link the IRGC with nefarious counter-parties in China and elsewhere. U.S. intelligence has improved dramatically in identifying such transactions, but it may at times be a game of Whac-A-Mole.
A well-known expression says, "Don't try to explain anything complex in the Middle East without a conspiracy theory." Undoubtedly, this action will provide fresh material, and the Iranian government will do its best to stoke anti-American sentiment in a volatile region.
Trump administration actions on Iran have dramatically cut Iranian government revenues and their financial capacity to support terrorism in the region. But the reaction to the latest announcement won't be linear or proportional.
The intense hostility between the Kingdom of Saudi Arabia and the Islamic Republic of Iran has played out in the bloody war in Yemen and the continuing conflict in Iraq.
U.S. sanctions on Iran are about much more than oil supplies and gasoline prices.
William M. Arnold is a professor of energy management at Rice University's Jones Graduate School of Business. Previously, he was Royal Dutch Shell's Washington director of International Government Relations and senior counsel for the Middle East, Latin America and North Africa.