by Jim Lobe

The Trump administration has “gone nuclear” in reportedly demanding that all of Iran’s current oil consumers completely eliminate imports of Iranian imports by November 4. This comes in the wake of the OPEC meeting in which, apparently under pressure from Saudi Arabia, the United Arab Emirates, and the United States, in particular, its members agreed to a modest increase in oil production beginning next month. Russia has also indicated that it favors an increase in its own production.

LobeLog recently interviewed Sara Vakhshouri, an internationally recognized expert on the energy market and security, on the implications of these moves. She is the president of SVB Energy International, a Washington-based strategic energy consulting firm that provides critical advice on the global energy market to private companies, governments, think tanks, investment banks, and media organizations.

Jim Lobe: In the short term, what impact do you believe these actions will have on global markets and price?

Sara Vakhshouri: It depends how much Iran oil is dropped from the market. If Iran’s export cut is correlated to the seasonal demand and market fundamentals, then like 2012-2015 nuclear sanctions we wont see a significant price spike. But if the US administration pushes for the maximum Iran export cut, then we will see a price hike in the market.

Back in 2012-2015, there was a significant production surge from US shale oil. But now we are not expecting a significant production rise but only the spare capacity in the market. Saudi Arabia could technically produce 2 million barrels per day. UAE and other OPEC members, along with Russia, could cover for Iran oil at the time of sanctions. But current supply interruptions from Venezuela and Libya make the market psychology very sensitive to the usage of the spare capacity to cover for Iranian oil exports. This will push future prices high as the market is worried about any escalation of conflict in the region, for instance between Saudi Arabia and Iran, or closer to the Hormuz Strait.

Lobe: To what extent do you think Saudi Arabia and UAE are coordinating with the Trump administration on oil production in order to put pressure on Iran’s economy?

Vakhshouri: It’s not only Saudi Arabia and UAE, but other OPEC members and Russia will try to create a balance in the market to prevent a price shock. But the market will surely see higher oil prices, for the reasons I mentioned above.

Lobe: How much do you expect key oil exporters, particularly Russia, Saudi Arabia, Iraq, UAE, and Iran, to increase production over the coming months before the November 4 deadline?

Vakhshouri: Technically all of the mentioned countries could raise their production up to 2.5 million barrels per day to cover all of Iran’s oil exports. However, as I mentioned, this creates a significant gap in spare capacity in the market, particularly in the event of emergency. Recently Iran tried to remind the world of the danger of using all of its spare capacity to substitute for Iran’s oil.

By using the threat of closure of the Hormuz Strait, Iran wants to warn the oil market away from using its maximum spare capacity to cover for Iran’s oil exports. It’s reminding the market of the scenario of no spare capacity and possible geopolitical conflict and supply cut! Iranian Presidents Hassan Rouhani and Mahmoud Ahmadinejad both used the same exact words for a same threat to their oil export: “if Iran oil is banned, not a single drop of oil will pass through Hormuz Strait.” These warnings should not be seen as the “bluster” of an irrational regime, but as an expression of Iran’s rubric of national security. I wrote more about this back in 2012.

Lobe: To what extent, if any, is Moscow cooperating with the KSA and the UAE (and/or the US) in increasing production despite its ties to Iran? What does this say about Moscow’s relationship with Tehran or is Moscow willing to increase production for entirely different reasons unrelated to its relationship with Iran?

Vakhshouri: Russia would naturally do what is the priority for its economy and national interest. In the past few years, relations between Russia and Saudi Arabia have gotten very close. The two countries not only are collaborating closely in the oil market, but they are looking to partners in the liquefied natural gas (LNG) industry. Expanding LNG production capacity and exports has been one of Putin’s priorities. Saudi Aramco is looking into a partnership and import of LNG from Russia. Investment in LNG and the security of LNG demand are very crucial for Russia’s interests and Putin’s energy policy. This new partnership between Saudi Arabia and Russia on one hand and possibly Russia-US rapprochement could obviously have an impact on Russia’s position and policy toward Iran.

Lobe: Regarding US demands to eliminate Iranian imports, do you believe they are motivated chiefly by a desire to weaken the Iranian economy, if not bring about its collapse, or by other considerations, such as gaining leverage with US trading partners or both?

Vakhshouri: The Trump administration is very determined to put significant economic pressures on Iran in the hopes of a shift in its missile program, its support for proxy groups like Hezbollah, and its broader policy in the Middle East. It seams that complying with US sanctions and supporting President Trump’s policy have been a major part of the undergoing negotiations between US and its trade partners.

Lobe: How do you expect key consumers—such as China, the EU, India, Japan, South Korea, and Turkey—will react to the Trump administration’s demands that they eliminate Iranian imports by November 4?

Vakhshouri: Unlike with the 2012 nuclear sanctions when the EU started the oil ban on Iran, this time the Asian buyers of Iran oil are the first to comply with US sanctions and reduce or stop their imports from Iran. Japan and South Korea are the first countries to start their import reduction even before November 4. By August 2018, when the first set of US sanctions will be implemented, South Korea, Japan, and India will likely reduce or stop their imports from Iran. China would continue using Iran sanctions as leverage in its trade negotiations with the US. Depending on the outcome of its trade negotiations with the US, China could reduce its imports from Iran.

EU countries would start reducing their imports from Iran gradually between August and November. The EU’s imports from Iran, which have increased from about 5-700,000 barrels per day before the 2012 nuclear sanctions to about one million barrels per day today, depend very much on its agreement with Iran. The EU tries to support Iran’s compliance with the JCPOA, but it’s only going to oppose US sanctions—in a practical way that Iran could benefit from—if Iran agrees to change its policy in the Middle East and particularly its missile program. This is very much in line with US demands of Iran. Otherwise, the EU’s support of Iran wouldn’t offer any solid legal or political protection for its companies to both invest in Iran and import oil from Iran. This means that EU companies will withdraw from Iran, stop investing in the country, and stop oil imports, and comply with US sanctions.

Lobe: In your opinion, how vulnerable is Iran’s economy to these sanctions compared to previous periods, such as the Iran-Iraq War or during the Ahmadinejad period as the sanctions regime against Iran tightened?

Vakhshouri: Iran’s economy is not in a very good situation. It’s still recovering from the 2012-2015 nuclear sanctions. It seams that Iran has run out of options. On one hand, complying with the Joint Comprehensive Plan of Action (JCPOA) no longer serves Iran’s interests and economic prosperity. On the other hand, Iran is required to commit to further agreements on its missile program and its policy in the Middle East. If Iran steps out of the JCPOA or reacts boldly to US sanctions, it risks its refined petroleum product and petrochemical experts. Iran’s departure from the JCPOA would unite the US and EU in implementing further harder economic sanctions against Iran.