How much Iranian oil will be lost if Trump scraps the JCPOA?
The range of estimates is wide and the White House isn’t giving much thought to what happens next
President Donald Trump will probably ditch the Iran nuclear deal on 12 May—on that, most everyone seems to agree. But consensus over the impact on oil supply is lacking. More than 1m barrels a day of supply could be lost over the next 18 months. Worse still, the White House might not really have a plan.
At stake are US sanctions waivers that have kept a renewed embargo at bay. Trump extended these waivers in January but said he wouldn't renew them again in May unless the European Union and Congress fix parts of the Joint Comprehensive Plan of Action (JCPOA) that he doesn't like.
The UK, France and Germany, the so-called E3, want to keep the deal running, and so have been trying to find some way forward.
Iran, according to international observers (and Trump's own team), isn't breaking the terms of the JCPOA—it's hard to fix something that is working. Congress is waiting on the E3. It seems implausible that a fix will be found to Trump's liking in the next few weeks or months.
So Trump is likely to scrap the waivers. This would probably kill the JCPOA outright, said Richard Nephew, a sanctions expert who worked in the Obama White House to erect the last oil embargo, in a recent interview with Petroleum Economist.
Those waivers suspend the sanctions in the National Defense Authorization Act of 2012, under which the US Treasury can penalise foreign companies doing business with Iran's Central Bank or some other financial institutions unless they reduced their Iranian oil purchases "to a significant degree". (Nephew has laid out the mechanics of all this in a useful article.)
Aside from letting the waivers lapse, Trump may also decide to pursue extra sanctions. Even if he doesn't, the US (which doesn't import any Iranian oil itself) would start to seek these "significant" reductions from other countries. While EU importers cut all purchases last time, Obama's administration settled on a 20% reduction from others. Trump won't want to be seen asking for less.
Efforts to sanction Iranian oil exports might lift the price, but without removing any oil. Tehran might thank Trump for the revenue bump
According to Nephew, what's in store is bullish. After ending the waivers, the White House would give buyers a period—at least 180 days—to wind down their Iranian supply deals and also to set a benchmark against which to measure reductions. The physical cuts might start in November 2019. After that, Nephew says 400,000-500,000 b/d of exports could be shut in within a year. Later, this could rise to more than 1m b/d.
But the caveats are numerous. China, now on the verge of a trade war with the US, probably wouldn't cooperate. India might not either. Between them, they import more than 1m b/d of Iranian oil. South Korea and Japan, were they to accept another 20% haircut on purchases, would reduce volumes by just 100,000 b/d or so. Europe's stance would be critical. Nephew says a 50% reduction this time would amount to about 330,00, b/d.
Others aren't convinced that anyone would cooperate. The crucial sanctions—in terms of supply volumes—last time were EU ones on shipping and insurance, says Robin Mills, chief executive of consultancy Qamar Energy. The EU, miffed that a deal it struck in good faith with Iran (and which is verified as delivering on its aims), doesn't seem minded to go down that route again. Unless Iran reacts to Trump's move by restarting its nuclear programme or escalating its ballistic-missiles one (a concern for the EU), Brussels might just stick with the JCPOA, or revive some blocking regulations to protect European companies.
"As long as Tehran abides by the JCPOA, it does not appear the EU will bring back its energy and financial sanctions against Iran," wrote David Ramin Jalilvand in a recent paper for the Oxford Institute for Energy Studies. It seems unlikely, he added, that the US pulling out of the JCPOA would "directly translate into bringing Iranian oil exports down dramatically—even though some US partners, especially in Asia, might partly cut back voluntarily some of their imports of Iranian oil".
That's not to say Trump's move won't have an effect. The uncertainty he's created around Iran—including more recently replacing Rex Tillerson with the hawkish Mike Pompeo as secretary of state; and making John Bolton, who has called for regime change in Tehran, his national security advisor—has already affected investment plans. Despite the fanfare about Iran's post-sanctions opening, the threat of snap-back sanctions has limited Iranian upstream contracts with Western companies to one sole deal (in gas not oil), with France's Total.
Worse still for the oil market, is that Trump's administration looks unprepared to execute its sanctions policy. Few of the experts that built the Obama sanctions regime remain in place. That previous effort relied on a planning and verification machine, which no longer exists. Even counting the barrels last time was a herculean endeavour, says Nephew, who was part of it. The institutional capacity has evaporated.
Nor, it seems, has the Trump administration thought deeply about the market impact if it is successful in removing the barrels. The Obama administration spent much energy assessing the optimum amount of oil to remove from Iran's exports, knowing Tehran, like other producers, would also get a price windfall from the market reaction. The magic number was 1m b/d; a volume that would punish Iran more than it would gain from the price increase.
The worst scenario for Trump is that his effort to sanction Iranian oil exports lifts the price, but without removing any oil. Tehran might thank Trump for the revenue bump. Or Iran might discount sales to guarantee custom in Asia—a neat reward for Trump's current bugbear, China.
"These guys aren't thinking," says Nephew of the White House's Iran plan. "They aren't experienced in the sanctions-implementation world."