Trump’s Iran Oil Sanctions Aren’t Living Up to the Hype

(Bloomberg Opinion) -- U.S. sanctions designed to push Iran’s oil exports to zero come into force at midnight, but the hard line initially signaled by President Donald Trump is softening as the deadline approaches. With countries that have already cut their purchases to zero now being granted waivers to buy Iran’s oil, the country’s exports may well go up, not down, in November.

These were billed as the “strongest sanctions in history,” intended to prevent the Persian Gulf country from exporting any oil at all. But the reality hasn’t quite lived up to the hype: In the six months before they fully took effect, the impact of the Trump sanctions looks remarkably similar to those of his predecessor in 2012.

With the November deadline looming, it became clear that buyers which agreed to reduce their purchases of Iranian oil might be able secure waivers from the sanctions. Back in August, Trump’s national security adviser, John Bolton, said these would be “few and far between.” This week, it emerged that the U.S. has agreed to let eight countries keep buying Iranian oil.

Details of the deal are sketchy, although Secretary of State Michael Pompeo has promised they will be revealed on Monday. The eight include China and India, the biggest buyers of Iran’s oil, as well as other key U.S. allies in Asia, Japan and South Korea. Turkey will also be permitted to continue buying, but the softening doesn’t extend to Europe. It isn’t yet clear how frequently the waivers will need to be re-validated, or by how much buyers will need to reduce their purchases to avoid penalties.

Under President Barack Obama, waivers lasted for six months and were renewed if countries had cut purchases by about 20 percent during that period. The conditions are expected to be at least as tough under Trump.

One big difference from the Obama-era curbs is that the Trump sanctions cover exports of condensates, a light form of oil extracted from gas fields. These have become more important to Iran as gas extraction has increased from the South Pars field that it shares with Qatar. But exports are expected to dwindle again as processing increases at a new refinery designed to process the liquids for domestic use.

Most buyers of Iran’s oil have taken a cautious approach since May. France and South Korea both halted purchases in June. Spain and Japan followed in September. Turkey has cut its purchases by about half compared with the previous summer, while Italy and Greece — the other significant EU buyers of Iranian oil — have made similar cuts. After a jump in the early summer, exports to India have also fallen. China, the biggest buyer of Iranian oil, has yet to cut purchases, although the government has told at least two state oil companies to avoid purchasing from the country.

Trump’s selective waivers are likely to have the perverse impact of allowing processors in South Korea and Japan to resume buying limited volumes from Iran in November. This could easily amount to as much as 300,000 barrels a day, given that their combined purchases a year ago were almost twice that much. The Chinese state-owned companies are also likely to return to the market. The rebound will be partly offset by a further drop in European purchases, but these amounted to less than 100,000 barrels a day last month.

To be sure, Iran will only have restricted access to the money generated from these sales: Payments will have to be held in escrow accounts in the purchasing countries. But an increase in Iran’s oil exports in the first month of sanctions isn’t exactly the outcome Trump will have been hoping for.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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