Oil and the future of US-Iran relations post-elections
Iran and the US matter a lot in the energy world, and much is happening politically in both countries. The US will take a final leap into the next presidential election. The election outcome would largely determine the direction of global energy geopolitics over the next few years.
Undoubtedly, Washington is a heavyweight. It is by far the world’s largest economy and the largest crude consumer. The policies to be adopted by Washington vis-à-vis Iran, post-November presidential elections, are still to be known. Much would depend on who gets elected there.
Yet it is certain that the US election outcome would impact the energy world, its demand-supply dynamics, and global market prices, in a big manner.
With odds in favour of Donald Trump, the big question is, would he, if elected, opt for a tight squeeze on Iranian crude output until Tehran changes its policies on Israel, Saudi Arabia, and the other Gulf Arab countries and reins in Hezbollah in Lebanon and Houthi militia in Yemen?
Tehran is confident that its oil exports will continue regardless of who sits in the White House
That is a billion-dollar question.
While in office from 2016 -2020, President Trump and his administration not only opted to withdraw from the Obama-era nuclear deal with Iran, the Joint Comprehensive Plan of Action but also severely increased heat on Tehran. This resulted in Iranian crude exports plummeting from more than two million barrels per day (bpd) to less than 300,000 bpd by 2019, drying up the country’s main source of earning — oil sales.
There was a flicker of hope when Biden took over from Trump in 2020. That remains unfulfilled. In the absence of any breakthrough on the issue of reviving the nuclear pact, the Biden administration had little option but to increase sanctions. The domestic pressure on the administration didn’t allow him with much elbow room.
Under this approach, the Biden Administration sanctioned hundreds of Iranian entities, ships, and individuals accused of transporting and selling Iranian oil. However, wary of a considerable increase in price at the nearby gas stations during an election year, many have questioned if the US has fully enforced those sanctions.
The permutations could all change once the Washington elections are over and a new president takes over. The new administration won’t be faced with the compulsion to cool down gas prices urgently, which could help Washington tighten its policies towards Tehran if necessary.
One would thus need to wait until then to decipher the new (if any) direction of US policy towards Iran.
In the meantime, Iran has also been passing through a political upheaval.
Only a couple of weeks ago the country elected Masoud Pezeshkian as its new president. In sharp contrast to his predecessor, Pezeshkian, a cardiac surgeon by profession, is regarded as a reformist, moderate politician who favours reviving Iran’s nuclear deal and improving relations with the West. During the campaign, Pezeshkian promised the masses that he would get the sanctions removed and reach a revised nuclear deal with the West.
Could this result in a rapprochement with the West, opening Iran’s energy sector to the much-required investments by global oil majors, and increasing its crude output?
There is already a growing murmur in Iran on the cost of the Western sanctions on Iran and its economy. Hossein Selahvarzi, the former head of Iran’s Chamber of Commerce, in a press talk recently said that the sanctions have inflicted approximately $1.2 trillion in damages on the country between 2011 and 2023. In comments published last month in Tehran’s Shargh Daily, Selahvarzi discussed the economic opportunities lost by Iran due to the sanctions and underlined that the situation needs to be reversed.
Former Iranian President Hassan Rouhani also went on record last month saying that Iran has incurred an annual loss of some $100 billionover the past three years due to Western sanctions that forced the country to sell limited amounts of oil and petrochemicals at discounted prices.Rouhani accused former president Ebrahim Raisi’s government of “betraying” the Iranian people by causing $300bn in damages over three years.
Yet despite the US-led sanctions, Iran has been able to increase crude exports since the Trump administration imposed full US sanctions in May 2019.
Iran’s crude oil and gas condensate exports surged to 1.7m bpd in May, hitting a five-year high point. The oil analytics firm Vortexa reported that during the first five months of this year, Iran’s oil and gas condensate exports reached 1.65m bpd. Iran’s customs statistics also indicate an increase in oil revenues by 34.8 per cent year-on-year, to $12bn during the first three months of the current Iranian fiscal year, which started March 21.
Consequent to the output increase, Iranian exports have also surged. Data intelligence firm Kpler reported that Iran exported 1.19m bpd of crude oil and gas condensate in spring 2023. Therefore, the country’s oil exports increased by 30pc in the second quarter of 2024, while oil prices in international markets rose only by about 7pc during the mentioned period.
Iran has also been earning from other sources. A Pakistani intelligence report leaked out by the Iranian media recently says that Iranian traders are smuggling more than $1bn worth of fuel into Pakistan annually.
The Pakistani intelligence report spanning 44 pages, “Smuggling of Iranian Oil,” sheds light on the long-standing illegal trade that went up following US-imposed sanctions on Iranian oil exports. The sanctions pushed Tehran to seek alternative markets, significantly boosting the smuggling operations across the 900-kilometer Iran-Pakistan border.
The report reveals that last year alone, approximately $1.02bn worth of Iranian petrol and diesel was illegally transported into Pakistan, making up about 14pc of Pakistan’s annual fuel consumption. This export revenue is in addition to what has been reported above.
Iran is now confident that its oil exports will continue regardless of who is elected as the next US president, the Iranian Oil Minister Jawad Owji of the outgoing government told the Iranian press last month. “Whatever government comes to power in the United States will not be able to prevent Iranian oil exports,” Owji said in comments quoted by Iran’s official news agency IRNA.
Energy geopolitics is in for some major changes. A clear picture would only emerge once the new leaders settle down. In case Biden gets reelected, he may be more at ease in his second term in reaching an arrangement with the new, pro-West Iranian president. And if Trump gets back into the White House, one cannot help but point out that despite his political rhetoric, Trump is a pragmatist. Much may depend upon the chemistry between him and Pezeshkian.
Published in Dawn, The Business and Finance Weekly, July 15th, 2024