Iran is vulnerable to a Trumpian all-out economic assault
Summary
- Oil prices are already at a five-month high. How might they respond?
On November 25th the Elva, a tanker flagged in São Tomé and Príncipe, clandestinely picked up 2m barrels of Iranian crude off Malaysia’s coast. Sailing from there to north-east China, the vessel’s likely destination, usually takes two weeks at most. But not this time. On December 3rd, alleging the Elva had breached sanctions, America blacklisted the ship, exposing anyone dealing with it to punishment. Six weeks on it is still stranded less than 20km from where it collected its cargo.
The Elva has company. Since October, when the Biden administration started cracking down on Iran-linked tankers, their crude deliveries to China, which buys nearly all of Iran’s oil, have shrunk by a quarter, to 1.3m barrels per day (b/d). At the same time, loadings from Iran have continued apace, in the hope of a change of circumstances. The result is that there is now four times as much Iranian oil stranded at sea—20m barrels—most of which sits off the coasts of Malaysia and Singapore.
In the final days of the Biden presidency America is striking Russia, too. On January 10th officials announced new sanctions against 143 tankers, accounting for 42% of Russia’s seaborne oil exports last year, as well as large exporters and insurers. This will cause headaches in the short term for Vladimir Putin, and is one reason why Brent crude, the global benchmark, hit $81 a barrel on January 13th, its highest in five months. Yet it is Iran that faces the bigger threat. Donald Trump remains ambivalent about blockading Russia but is committed to strangling Iran’s finances. He might well succeed, and in doing so disturb global energy markets.
For most of his tenure Joe Biden turned a blind eye to Iran’s burgeoning oil trade. Between 2018, when the first Trump administration reimposed harsh sanctions, and last year, the country’s crude exports grew twelvefold to 1.8m b/d. Then, in October, Mr Biden changed tack. In the months since, America’s Treasury has added 55 tankers to its Iran-linked blacklist, equivalent to a third of the “dark" fleet tasked with carrying Iran’s crude, says Homayoun Falakshahi of Kpler, a data firm.
People familiar with the administration say officials have realised that their lenient approach towards Iran has failed. Iran has been weakened not by sanctions but by Israel’s victories over Hamas and Hezbollah, as well as the fall of Bashar al-Assad in Syria. It is also close to building a nuclear weapon. Meanwhile, global oil supply is plentiful and demand weak, making it less likely that sanction enforcement will hurt American consumers. In any case, more expensive petrol will henceforth be Mr Trump’s problem.
The Biden administration is making clever use of sanctions. Most of Iran’s barrels are bought by small, unsophisticated refiners in China’s north-east, dubbed “teapots", which rely on cheap crude to turn a profit. The teapots sell their products at home in local currency. That makes them immune to “secondary" sanctions, which ban American firms from dealing with any company that knowingly buys Iranian oil. But they still need Iran-linked tankers to dock at a Chinese port, many of which also earn a living by shipping goods to America.
Aware of this, sanctions-enforcers have targeted tankers responsible for the last leg of an Iranian barrel’s journey, typically from Malaysia to China. Fearing punishment, Chinese ports have started to reject these tankers. On January 6th Shandong Port Group, which runs ports in locations including Qingdao, Rizhao and Yantai, banned tankers blacklisted by America. Since supply has begun to dry up, Iranian crude now trades at just a $1.50 discount to Brent, the global benchmark, compared with $6.50 three months ago. The price rise is enough to have forced some teapots out of the market, in turn curtailing demand for Iranian oil.
Iran is working hard to replace blacklisted tankers with “clean" ones, an exercise in which it has form. Yet the global dark fleet has grown so large—it now absorbs most of Russia’s oil exports—that there may not be enough ships to recruit, especially since Russia also needs new ships to replace the ones that America blacklisted last week. And China’s teapots were already struggling. A spate of larger, nimbler refineries, built this decade, are eating away at their margins. The government, which objects to their pollution, is granting the firms meagre import quotas.
Enter Mr Trump. As a first move, his administration could add more tankers and traders to the Treasury’s naughty list. A bigger move, which insiders say Mr Trump’s team is discussing, would be to tell China that America will place sanctions on any port receiving Iranian barrels. The most aggressive option would be to impose huge tariffs on China until its government agrees to enforce a ban on imports of Iranian oil, among other conditions.
Employing such tactics could lead Iranian crude exports to fall by 1m b/d by the summer, compared with levels seen in 2024, reckons Robert McNally, a former adviser to President George W. Bush. In a relatively benign scenario the global supply surplus, coupled with spare production capacity, would limit the subsequent oil price rise to $5-10 a barrel, which might be acceptable to American consumers, while providing a fillip to the country’s shale producers.
A less benign scenario would see Iran respond by lashing out at other Gulf countries—or, worse, blocking the Strait of Hormuz, a waterway through which 30% of the world’s seaborne crude and 20% of its liquid natural gas passes. America might in turn respond by sending in its navy. Iran’s leaders have repeatedly said that if they cannot export, no one else will. Once cornered, they could resort to desperate measures. The time has never been better for an economic assault on the Islamic Republic. That does not make it a safe choice.
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