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Business News/ Opinion / Why president-elect Trump could be Opec’s new best friend
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Why president-elect Trump could be Opec’s new best friend

President-elect Donald Trump could end the nuclear agreement with Iran and cut the million barrels supply a day deal, meeting Opec's agenda

Donald Trump in March had called the Joint Comprehensive Plan of Action a ‘disastrous deal’. Photo: AFPPremium
Donald Trump in March had called the Joint Comprehensive Plan of Action a ‘disastrous deal’. Photo: AFP

London: Last week, I wrote that Organization of the Petroleum Exporting Countries (Opec) needs friends and a miracle to re-balance the oil market. Could president-electTrump be that unwitting buddy, providing the miracle by tearing up the nuclear agreement with Iran and removing almost a million barrels a day of supply at a stroke?

Trump’s number one priority is to dismantle the “disastrous" deal—although his to-do list might have changed since saying that back in March. As luck would have it, that daily million barrels is about the same size as the cut Opec needs to make, as I calculated last week.

Can he do it? Yes, despite assertions to the contrary from Iran’s President Rouhani and a slew of analysts. Here’s how:

The Joint Comprehensive Plan of Action, as the deal is snappily titled, wasn’t ratified by Congress, but brought into force by President Obama via executive order. Trump could rescind that. The fall-out would be messy, but it could be done (in theory).

There’s another way too, enshrined within the agreement itself. The dispute resolution mechanism allows any signatory to refer a perceived breach of the deal’s terms to the joint commission created to oversee the accord. If the complaining party isn’t satisfied with the outcome and believes the breach constitutes “significant non-compliance", it can refer it to the UN Security Council. The Security Council would then vote—and here’s the killer blow—not on whether to re-impose sanctions, but on whether to “continue the sanctions lifting."

That might not sound like a big difference, but it’s critical. By framing the vote this way, the US could, in theory, veto the resolution. All the UN sanctions on Iran would then be re-imposed. Simple.

That just leaves European Union (EU) sanctions, which prohibited—among other things—the importing of Iranian oil into EU countries. We might expect some sort of European backlash against unwinding the deal, but it might not be very effective.

The tortuous process of re-establishing Iran’s oil trade with Europe shows that only too clearly. Although there were willing buyers and a very willing seller, the difficulty came in finding insurers who would underwrite the transactions, or shippers to carry the crude. All the big re-insurers had at least some US involvement and they were extremely hesitant to pick up the business—even with the apparent backing of the Obama administration. They would drop the business like a scalding hot potato if the new president killed the deal. End of Iranian oil flows to Europe.

Elsewhere, important Asian buyers were threatened in the past with the loss of access to the US banking system to persuade them to cut their purchases of Iranian. This tactic would probably work again.

Of course, Iran would treat the move as grounds to abandon its own commitments. Coming shortly before Iran’s presidential election in May, it would be a huge boost to Tehran’s hardliners. You’d expect life to become more difficult for the Americans in Iraq, where it’s engaged alongside Iranian-backed militias in ousting Islamic State from its last stronghold in the country—another Trump priority.

But at least the crude price would recover, which would be great for US oil, if not so good for motorists. I guess the new president will have to choose who to please. Bloomberg

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Published: 13 Nov 2016, 07:42 PM IST
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