Can the U.S. Make Oil Sanctions on Iran Work?

With two weeks to go until U.S. sanctions officially take aim at Iran’s oil exports, it’s not at all clear how much crude Iran is still selling—or which countries will keep buying it—raising questions about the effectiveness of the main thrust of Washington’s pressure campaign against Tehran.

Since Washington announced a resumption of U.S. sanctions on Iranian oil exports this spring, after President Donald Trump pulled out of the Iran nuclear deal, Iran has scrambled to salvage one of its main sources of revenue—with some apparent success. While the Trump administration says it hopes to drive Iran’s oil exports to zero, that hasn’t come close to happening yet.

It’s hard to get a clear picture of exactly how much the looming sanctions have impacted Iran’s exports. Most estimates—from the International Energy Agency, the U.S. Energy Information Administration, and independent consultants—peg Iran’s current oil exports at 1.6 million to 1.7 million barrels a day, down from 2.5 million barrels a day before sanctions were announced. That would be a significant drop—close to the total impact on Iranian exports from Obama administration sanctions—and more than many observers initially expected.

But there’s plenty of confusion as to what’s really happening with Iran’s crude shipments. TankerTrackers, using satellite data to track physical shipments, suggested late last week that Iranian exports have dropped only a tiny bit, to about 2.2 million barrels per day. Those higher numbers seem to be backed up by reports of increasing amounts of Iranian oil heading to India and China, two of Tehran’s biggest customers.

India had indicated that it would stop importing Iranian oil altogether by November but is now studying ways to keep buying. And China appears to be importing “unprecedented” amounts of Iranian oil ahead of the official imposition of sanctions. Even countries such as South Korea that seemed to be quickly and completely complying with U.S. demands to stop buying Iranian oil now seem to be seeking waivers from the Trump administration to keep doing some business with Tehran. Turkey, a big European customer for Iranian oil, is also trying to get a waiver to keep buying some Iranian oil after sanctions take effect.

Even the best-informed people in the energy world are uncertain about what will ultimately happen when U.S. sanctions take effect in early November, given continued appetite in parts of Europe and Asia for Iranian crude. Saudi Arabia, which has pledged (but struggled) to help make up for missing Iranian barrels to stabilize the oil market, throws up its hands when trying to figure out the ultimate impact of U.S. sanctions.

“We have sanctions on Iran, and nobody has a clue what Iranian exports will be,” Saudi Energy Minister Khalid al-Falih told Tass in a recent interview. For Saudi Arabia and for the global economy, it’s an important question. Falih says that the Saudis can make up some of the shortfall if Iranian exports fall sharply, but only up to a point, since it now has limited spare capacity to pump more oil.

“This is the messy picture that everybody was expecting—it was entirely foreseen,” said Elizabeth Rosenberg, a former Treasury Department official in the Obama administration now at the Center for a New American Security.

Unlike the previous round of U.S. sanctions on Iranian oil exports from 2012 to 2015, which had buy-in from most of the world and clearly stated, gradual reductions in purchases by Iran’s top customers, the Trump administration simply told all countries to reduce their purchases to zero.

“Because the United States hasn’t adopted any standard that can be applied equally across the board, every purchaser is measuring itself against others to see who’s getting the most,” Rosenberg said.

The reports late last week that Iran could be exporting a lot more oil than expected raised plenty of eyebrows, but some energy experts caution against reading too much into those numbers. When Iran faced oil sanctions previously, it diverted to storage some of the oil it pumped but couldn’t sell. Something similar appears to be happening this time, said Sara Vakhshouri, a former Iranian oil executive who is now the president of SVB Energy International, an energy consultancy.

“Iran in September and October has been storing significant amount of liquid in its floating storages and storage tanks outside of Iran. But not all of these amounts are sold and can be counted as export,” she said.

Of course, putting that oil into storage can also make it harder to track what happens to it down the road, “so there is an evasion element, too,” said Richard Nephew, a former Iran sanctions architect in the Obama administration now at Columbia University’s Center on Global Energy Policy.

If it’s hard to get a clear picture of how much oil Iran is still exporting, it’s also difficult to gauge the economic impact of the U.S. pressure campaign. Crude oil prices, hovering around $80 a barrel, are roughly 40 percent higher than they were during 2017. That means that, even if Iran is exporting fewer barrels, its oil-export revenue may not have dropped very much.

“Iran set its budget to $57 oil, so $80 oil even with lost exports isn’t bad,” Nephew said.

Iran’s economy has other problems, such as a plunging currency and high inflation, which have been aggravated by the return of U.S. sanctions, and the growth outlook is dire. But as the Trump administration seeks to ratchet up the economic pressure, it faces another obstacle: European resistance.

European Union countries, as well as China and Russia, all wanted to maintain the 2015 nuclear deal with Iran. The EU, far from matching U.S. sanctions with its own ban on Iranian oil as it did from 2012 to 2015, is actively working to keep Iran in business, proposing the creation of a special financial vehicle that would enable Iran to keep selling oil without falling afoul of U.S. sanctions. The French Foreign Ministry now says the idea is to “make financial transactions easier for firms that want to maintain trade relations with Iran, in accordance with European law.”

The EU has vowed to shield European companies from U.S. sanctions in other ways, such as 1990s-era blocking legislation—with little success so far because few firms want to lose access to the U.S. financial system. But the proposed special vehicle to enable Iran to keep selling oil could work if it has support from China and Russia.

“If European and potentially Chinese and Russian companies want to get involved, there’s a high likelihood that it can succeed for the continued sale of Iranian oil,” said Joshua Kirschenbaum, a former Treasury official now at the German Marshall Fund of the United States.

While French officials talk of using the special vehicle to sidestep a wide range of U.S. extraterritorial sanctions, Kirschenbaum sees it more as a way to keep the Iran nuclear deal on life support for a little longer.

“The European strategy seems to be to make it tolerable enough for Iran to stay in the deal for two more years, then see what happens,” he said.

And while it may be too early to say whether European efforts to shield Iran will succeed, the mere fact that they’re trying underscores problems with the Trump administration’s approach, Kirschenbaum said.

“It’s not good for U.S. policy to have the EU actively coordinating with China and Russia to get around our sanctions. We backed Europe into a corner,” he said.

Rosenberg doesn’t expect the picture to become much clearer even after U.S. sanctions officially go into place in November. Countries that buy Iranian oil will likely begin testing how far they can push purchases without provoking financial penalties from Washington, putting U.S. policymakers in the tough position of potentially having to sanction close allies.

“Will the United States try to do enforcement actions against everybody trying to push it, or will it fold?” Rosenberg said. The Trump administration’s effort to use the central position of the U.S. financial system to squeeze Iran could backfire, she said.

“This effort was born out of a desire to use the strength of the United States in the global financial system, and it will have the effect of diminishing it instead,” she said.

Ultimately, Nephew said, the Trump administration’s goal of forcing Iran to drastically change its behavior may founder if the oil sanctions are less effective than envisioned.

“The key for this administration is that they’ve basically bet big that being big and mean will be more effective than patient and cooperative,” he said. “If Iran’s government is still kicking around come a year from now—which I think is near certain—then I think the administration is going to be grasping at straws for what to do next.”