Trump risks higher oil and gas prices to crush Iran

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President Trump is making his biggest bet yet that his hardline approach with adversaries Iran and Venezuela, both big energy market players, won’t harm Americans with higher oil and gas prices.

Oil market and foreign policy analysts say Trump will have a hard time managing the risks of his decision to stop granting exemptions to Iranian’s biggest oil buyers, forcing all countries, including China and India, to stop buying oil from Tehran or face U.S. sanctions.

“There is a lot of risk attached to this decision,” said Richard Nephew, a senior research scholar at Columbia University’s Center on Global Energy Policy who directed sanctions policy at the State Department in the Obama administration. “There’s a pretty big chunk of oil that is just going to be gone.”

Iran currently exports about 1 million barrels a day, roughly 1% of world supplies, with oil typically equaling 40% of the country’s revenues.

But beginning in early May, purchasers risk being blocked from the U.S. financial system.

[Related: Your summer vacation just got more expensive; blame the Iran sanctions]

Nephew and other analysts say Trump’s move could roil global oil markets, damage trade negotiations with China, and provoke retaliation by Iran.

If Trump succeeds in eliminating oil exports from Iran, it will likely raise prices at a time when the global economy is slowing and summer driving season is approaching in the U.S.

Going to “zero” on Iran’s oil exports, as the Trump administration has promised, would mean removing 900,000 to 1 million barrels per day of oil from an already tightening global market.

The global oil price benchmark increased 3% to more than $74 a barrel on Monday in reaction to Trump’s decision to cut off Iranian oil, the highest level in six months.

Oil prices, and as a result U.S. gas prices, have already risen since mid-February as Saudi Arabia, its OPEC partners, and Russia cut production as part of a pact to raise prices, which had crashed after Trump offered temporary waivers to the Iranian sanctions in November.

Other oil supply disruptions are occurring in Venezuela from U.S. sanctions, while major outages are possible in Libya, Algeria, and Nigeria, analysts say.

Frank Verrastro, senior vice president of the energy and national security program at the Center for Strategic and International Studies, said Trump will have trouble avoiding blame if prices rise.

“This has been a game,” Verrastro said. “Trump has been trying to delicately balance the market without taking the blame himself when prices go up, but this administration has taken more oil off the market than OPEC. Prices in the short term are definitely going up.”

Trump and Secretary of State Mike Pompeo expressed confidence Monday that Saudi Arabia and other Gulf allies will help offset Iran’s lost oil exports.

The U.S. leaders also boasted about record domestic shale oil production, but American producers’ “light-sweet” type of oil is not the best substitute for Iran’s heavier grade crude.

Verrastro argues it’s “more than questionable” the Saudis will deliver to help make the difference, with the country seeking higher prices to finance its budget.

Saudi Energy Minister Khalid Al-Falih released a noncommittal statement Monday, saying the country would seek to “ensure a well-balanced and stable oil market” in response to Trump’s Iranian sanctions.

“It is hard to fault the Saudis for the wait-and-see approach, but the market was likely hoping for a stronger statement on commitments to adding supply,” said Joseph McMonigle, a former chief of staff at the Energy Department during the George W. Bush administration.

Nephew, however, said the Saudis share an interest with Trump in depriving Middle East rival Iran of revenue, and could decide to abandon its plan to cut oil production when it revisits the pact in June.

“There is no question the Saudis want to draw Iran to zero oil exports,” Nephew said. “They will prioritize that over the OPEC deal. They made the calculation a long time ago that bankrupting Iran is good for Saudi Arabia.”

But Iran’s biggest buyer, China — importing about 500,000 barrels per day — is already resisting Trump’s sanctions, which could complicate U.S. efforts to negotiate a trade deal with Beijing that has major energy implications.

“Most countries will comply with U.S. sanctions, but the big $80-plus-per-barrel question is what does China do?” McMonigle asked. “It’s not clear that the Administration even knows the answer to this question, and many believe China’s oil imports from Iran are also tied to trade discussions with the U.S.”

China’s Foreign Ministry released a statement Monday saying its “cooperation with Iran is lawful” and it opposes the “unilateral sanctions and so-called ‘long-arm jurisdictions‘ imposed by the U.S.”

Iran could also retaliate against the U.S. and its Gulf allies.

Iranian leaders threatened Monday to shut the Strait of Hormuz, a key maritime transportation route for Gulf oil producers, and said it’s engaged in “intensive” talks with allies to limit the impact of Trump’s move.

“Iran won’t accept being the only ones who can’t sell oil,” Nephew said.

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