Fresh U.S. Sanctions Not Likely to Strangle Iran’s Oil Market

President Donald Trump on Tuesday announced U.S. withdrawal from the Iran nuclear deal and promised fresh U.S. sanctions on Iran’s economy, especially on its oil industry. But it’s unlikely the new measures will lead to a replay of the stranglehold that choked off more than half of Iran’s oil exports after 2012 and forced Tehran to the negotiating table.

The decision, coming after months of failed efforts among the United States and its European allies to find a way to toughen the existing agreement, is the starting gun for U.S. withdrawal from a pact Trump has long described as the “worst deal ever.”

“The Iran deal is defective at its core,” Trump said from the White House, vowing to reinstate the “highest level of economic sanctions” on Iran. The president claimed that Iran was continuing to pursue nuclear weapons, in direct contradiction to international inspectors and the U.S. intelligence community, which has concluded that Tehran is complying with the restrictions in the 2015 accord.

The first type of sanctions liable to be put back in place are limits on Iranian oil exports, first instituted in 2012. If the United States seeks the same kind of restrictions on Iranian oil exports as those under the Obama administration — the main cudgel used to batter the Iranian economy and regime into submission — that could mean a reduction of about 20 percent, or as much as 400,000 to 500,000 barrels a day. That would be worth about $1 billion a month at current prices. (Iran recently ramped up oil exports to 2.7 million barrels a day, but it can reliably export about 2.2 million barrels.)

While oil-related sanctions won’t kick in for six months, the oil market has been nervous about losing part of the output of one of OPEC’s biggest oil exporters. Iran deal jitters pushed up global oil prices above $75 a barrel at the start of the week, the highest since late 2014. After Trump’s announcement, crude oil prices in New York and London fell slightly.

But there are some key differences from 2012 that make it less likely that the United States will be able to repeat the success it had last time it targeted Iran’s oil exports, when it knocked more than 1 million barrels a day out of the market. Most importantly, European and Asian countries that buy Iran’s oil aren’t enthusiastic about joining Washington in putting the squeeze on Tehran, because they see Iran as continuing to comply with the deal.

“If the United States puts sanctions on Iranian oil exports, it won’t be as effective as back in 2012, simply because there is not an agreement between the major powers — the U.S. and the EU — over implementing sanctions on Iran because of its nuclear program,” says Sara Vakhshouri, an expert formerly of the Iranian national oil company and now head of SVB Energy International, a consultancy.

At the same time, oil supplies are restricted by OPEC’s decision to cut back output and by Venezuela’s meltdown, while demand for crude is booming. That raises the risk that any constraints on Iran’s exports could further drive up prices and create headwinds for the economy, especially in big oil consumers such as the United States and China, while potentially offering a windfall to big exporters such as Russia, Saudi Arabia, and Iraq.

By law, the United States must determine that the global oil market is well supplied before slapping sanctions on Iran’s oil exports — and that might be a tough argument to make with crude prices approaching four-year highs.

“The United States has to certify the availability and affordability of crude oil,” says Kevin Book, head of ClearView Energy Partners, an energy consultancy. “If everything is not fine, it may be harder to proceed with sanctions.”

The most important difference from 2012, when U.S. sanctions more than halved Iran’s exports and cost Tehran billions of dollars in lost revenue, is the lack of international unity. At the time, Asian and European countries that bought Iranian oil were willing to cut back their purchases because they shared U.S. concerns about Iran’s pursuit of nuclear weapons. European buy-in was particularly important, with countries like Italy reducing their own purchases and Brussels supporting additional sanctions that drove a stake through Iran’s oil exports to Asia.

“In 2012, we saw a dip in Iranian exports, then a rebound, then we saw a huge drop-off after people came to realize the global effort,” says Jason Bordoff, a former energy advisor in the Obama White House and now the director of Columbia University’s Center on Global Energy Policy. “That took months of diplomacy to persuade the Indians and Chinese and others to reduce purchases, and it may be hard to get the same amount of pressure this time.”

Now, Europe — led by France, Germany, and the United Kingdom — is scrambling to preserve the deal; British Foreign Secretary Boris Johnson was urging Trump as recently as Monday to stay in the pact, and French President Emmanuel Macron gave it a try Tuesday.

The European Union foreign affairs representative, Federica Mogherini, said Tuesday that the EU will continue to abide by the nuclear deal as long as Iran does, and expressed particular concern about fresh economic measures aimed at Iran. “I am particularly worried by the announcement of new sanctions,” she said in a statement. “The European Union is determined to act in accordance with its security interests and to protect its economic investments.”

That reluctance to join with the United States makes additional sanctions, like restrictions on maritime insurance that paralyzed Iran’s tanker fleet, less likely. And the European Union has already talked about using “blocking legislation” to shield European firms from U.S. sanctions on Iran. With that, European companies that buy Iranian crude are reportedly starting to look for alternate suppliers ahead of Trump’s sanctions announcement.

Yet Europe only buys about one-third of Iran’s oil exports; most of the rest goes to Asia. And it’s far from clear that the largest Asian buyers of Iranian oil are prepared to significantly cut back. China and India together buy more than a million barrels of Iranian oil every day, and both are posting record levels of crude oil imports, which means they need as many suppliers as possible.

“India has made it very clear they will keep buying, and China too,” says Book, of ClearView. He says that the most likely result of a return to oil sanctions is a shift in flows of Iranian oil, but not overall volumes, from countries that are risk averse to countries that are more willing to do business with Tehran. “Both could ramp up purchases, which would compensate for any reductions in Europe.”

The other main Asian buyers, South Korea and Japan, have started throttling back their purchases of Iranian oil this year, anticipating a possible return of U.S. sanctions.

Iran, for its part, sounded a defiant note ahead of Trump’s announcement. Iranian President Hassan Rouhani said the country might face a few months of difficulty but would soldier through. Iranian oil officials vowed to keep pumping and exporting oil despite any U.S. sanctions, and they expressed hope that billions in promised foreign investment in the energy sector will materialize this year.

But much of that promised investment never materialized after the end of sanctions, making it even harder politically for defenders of the deal inside Iran to keep supporting the agreement and its restrictions on the country’s nuclear program. With dwindling economic incentives to cooperate, Tehran may just go back to its old nuclear playbook, Bordoff suggests. Rouhani suggested after Trump spoke Tuesday that Iran could start enriching more uranium than before.

“There is a real risk that they drop the deal and go back to pursuing nuclear activities,” unless Europeans are willing and able to moderate that impulse, he says.

This article was updated early Tuesday afternoon.