Sanctions on Iranian Oil are 'Untenable'

Geopolitical tensions thrust Iran into an international spotlight in January, in a series of events that briefly unnerved oil markets.

The aftermath could have serious, longer-term effects on the oil and gas industry, although those repercussions are difficult to predict. There is one certainty, though, said Jim Krane of the Baker Institute for Public Policy in Houston:

Iran’s situation under continued U.S.-enforced sanctions is untenable.

Krane is Wallace S. Wilson Fellow for Energy Studies at the Rice University policy institute. He earned a doctorate from Cambridge University and is a member of that school’s Energy Policy Research Group, in addition to teaching classes on energy policy and geopolitics at Rice.

In his career before academia, Krane was a longtime journalist who reported from the Middle East as a correspondent for the Associated Press, and spent more than a year based in Iraq, where he covered the aftermath of the U.S. invasion and ensuing insurgency. He is author of the books “Energy Kingdoms: Oil and Political Survival in the Persian Gulf” and “City of Gold: Dubai and the Dream of Capitalism.”

After the killing of Iranian General Qassem Soleimani in a U.S. drone strike in Baghdad, Krane said he wrote an opinion piece with a colleague about Iran’s potential to respond to the incident.

“We concluded it would be hard for Iran to do that in a way that caused a large and sustained increase in the oil price,” he said.

“Iran doesn’t have a lot of choices if it wants to avoid a U.S. attack on its homeland,” he added.

Iran’s Limited Arsenal

One dilemma for Iran is its lack of military power compared to the United States and constraints on its ability to respond with direct force, according to Krane.

Image Caption

The Shahluleh (main oil pipeline) over Sefidrood north Iran. Photo by the National Iranian Oil Company (NIOC).

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Geopolitical tensions thrust Iran into an international spotlight in January, in a series of events that briefly unnerved oil markets.

The aftermath could have serious, longer-term effects on the oil and gas industry, although those repercussions are difficult to predict. There is one certainty, though, said Jim Krane of the Baker Institute for Public Policy in Houston:

Iran’s situation under continued U.S.-enforced sanctions is untenable.

Krane is Wallace S. Wilson Fellow for Energy Studies at the Rice University policy institute. He earned a doctorate from Cambridge University and is a member of that school’s Energy Policy Research Group, in addition to teaching classes on energy policy and geopolitics at Rice.

In his career before academia, Krane was a longtime journalist who reported from the Middle East as a correspondent for the Associated Press, and spent more than a year based in Iraq, where he covered the aftermath of the U.S. invasion and ensuing insurgency. He is author of the books “Energy Kingdoms: Oil and Political Survival in the Persian Gulf” and “City of Gold: Dubai and the Dream of Capitalism.”

After the killing of Iranian General Qassem Soleimani in a U.S. drone strike in Baghdad, Krane said he wrote an opinion piece with a colleague about Iran’s potential to respond to the incident.

“We concluded it would be hard for Iran to do that in a way that caused a large and sustained increase in the oil price,” he said.

“Iran doesn’t have a lot of choices if it wants to avoid a U.S. attack on its homeland,” he added.

Iran’s Limited Arsenal

One dilemma for Iran is its lack of military power compared to the United States and constraints on its ability to respond with direct force, according to Krane.

“Its policymakers understand that Iran is not going to win a head-to-head, toe-to-toe war with the United States, and maybe not even with other countries in the region,” he noted.

“They’ve got a lot of asymmetric – what some people might call ‘guerilla’ – tactics and weaponry available to them. They aren’t harmless. They just don’t have a powerful, conventional military,” he said.

Another problem for Iran is the current abundance and diversification of world oil supply, which makes it difficult for the country to use oil prices as a weapon, Krane said.

“With market conditions the way they are now, Iran’s options are even more limited,” he observed.

Curtailment of Iranian oil production in 1979 caused a global panic and more than doubled the world price of crude, but “we don’t think there’s much chance of that happening again,” Krane said.

One reason is the significant, recent growth of U.S. unconventional oil output. Increased American crude production not only provides a buffer for the United States, “it protects the entire world because there’s a single global oil market,” Krane noted.

Also, “the threat of climate action is incentivizing countries to move oil supply to market sooner rather than later,” further boosting global crude output, he said.

Surprising Stability

In some ways, Krane noted, it’s remarkable that the situation in Iran and the surrounding region is not more unsettled at this point.

He said he was surprised the air attack on Saudi Arabia’s large Abqaiq processing facility in September didn’t have more of an impact. The United States charged that Iran was behind the attack, although the Houthi movement in Yemen claimed responsibility.

Krane called the ongoing civil war in Yemen “a tragedy.” Saudi Arabia has led a coalition of countries in an intervention into the war, including bombings and a naval blockade. However, “the Yemeni civil war has not heated up again, and that’s a good thing,” he said.

After Iran fired missiles at U.S. facilities in Iraq in response to Soleimani’s death, U.S. President Donald Trump ordered additional sanctions on Iran’s metal exports and eight senior Iranian officials.

That put an added squeeze on a country where demonstrators have taken to the streets to protest weak economic conditions. Protests also erupted across Iran after a state-mandated increase in gasoline prices last November.

Iran’s economy has declined markedly since the United States re-imposed sanctions on the country’s energy, financial and shipping sectors in 2018.

“If we keep going down this road, it’s a recipe for war. It’s not tenable for Iran to be under this much pressure for long,” Krane said.

“The U.S. sanctions on Iran are unbearable. They’re going to have to do something,” he added. “Iran doesn’t have much of a choice. Their country is in pretty bad shape unless those sanctions are lifted.”

Iran’s Options

Iran has a number of alternatives and “things could go in a lot of strange directions,” Krane predicted. Those include the possibility of some kind of international détente involving Iran, or Iran trying to wait out the Trump administration, or Iran turning to Russia or possibly countries in Europe for assistance.

“They seem to be playing this interesting diplomatic game, trying to drive a wedge between the U.S. and its European allies,” Krane observed.

Several times Iran has threatened naval action to close the Strait of Hormuz, a strategic chokepoint for oil shipments as the only sea passage for Persian Gulf crude. Or Iran could resume a campaign of harassing oil tankers in the region.

But it’s still hard to imagine Iran responding in a way that would have a substantial long-term effect on the global oil picture, given today’s world crude-supply conditions, Krane said.

“There’s so much more and so much diversity in oil supply coming on that’s not being matched by demand growth,” he noted.

Despite their differences, the United States and Iran are not necessarily natural enemies and the relationship between the countries has to be assessed in the light of today’s political realities, Krane observed.

“Iran shares our interests in Afghanistan and Iraq. We fought side-by-side with Iran, like it or not, against ISIS,” he said.

“We’re in this period of uncertainty – there’s a resurgence of nationalism and populism, there’s concern about climate change. It’s having some seemingly distressing effects on politics,” he added.

In the end, the flap over Iran has found the international oil industry more or less unflappable, Krane observed.

“With all this chaos going on around it,” he said, “the oil industry just seems to be carrying on in stride.”

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