Secretary of State Mike Pompeo announced yesterday that the U.S. would stop granting the waivers that have allowed select importers to continue purchasing Iranian oil after the return of U.S. sanctions last November. By targeting an indispensable source of income for the clerical regime, the Trump administration took a major step toward implementing its policy of maximum pressure.
When the U.S. reinstated sanctions on Iran, it granted waivers to eight countries, allowing them to import slightly more than 1 million barrels of oil per day for a period of six months. The waivers are officially known as Significant Reduction Exceptions, or SREs. Despite the U.S. allowance of 1 million barrels per day, actual Iranian exports reached 1.7 million barrels per day in March, a difference worth tens of millions of dollars per day to Tehran.
Reducing Iran’s exports to zero, or even to less than 500,000 barrels per day, might strike a lethal blow to the regime’s finances. Iranian President Hassan Rouhani’s budget proposal for 2019 assumes exports of 1.5 million barrels per day at most and an average price of $54 per barrel; the resulting income would cover about $20 billion of the $47 billion Rouhani plans to spend.
While stopping the waivers is a logical extension of the president’s policy of maximum pressure on Iran, Pompeo’s announcement confounded the expectations of oil market analysts who assessed that Trump would shy away from any move that risked a major increase in gasoline prices for American consumers. With Venezuela’s exports down sharply and new unrest threatening Libyan and Algerian oil production, the potential cost of slashing Iranian exports has risen. The price of oil has already risen 40 percent in 2019, although it began the year just above $50 per barrel, at the low end of its range for the past five years.
To address such concerns, the president and White House staff emphasized commitments by the Saudis and Emiratis to increase oil production. The State Department pointed to an assessment from the U.S. Energy Information Administration (EIA), which indicated that OPEC’s spare production capacity is sufficient and growing. The EIA also forecast that the rapid growth of American crude oil production will continue this year and next, adding another million barrels per day to global supply.
The challenge now facing the Trump administration is vigorous enforcement of its zero oil policy. Three of the eight countries that now have waivers – Greece, Italy, and Taiwan – never used them. Two more – Japan and South Korea – are unlikely to test Washington’s resolve. This leaves China, India, and Turkey. Under the current waivers, China has a reported allowance of 360,000 barrels per day, India 300,000, and Turkey 60,000.
The administration should not compromise with Turkey, which remains unrepentant for its wholesale violation of U.S. sanctions prior to the 2015 nuclear deal with Iran, not to mention its wide array of other illicit behaviors.
India is a strategic partner with whom Washington should be able to resolve its issues quietly and amicably. The U.S. has already granted India a valuable exception to the sanctions on Iran so that Indian firms can operate the Iranian port of Chabahar. Further negotiation should ensure New Delhi finds an alternate source of imports.
Finally, the U.S. should seek agreement with China but be prepared to wield sanctions and other punitive measures. Telecom giant Huawei is already facing federal charges for violating sanctions on Iran and then destroying evidence of it. The president should be wary of hollow promises from Beijing that entail no meaningful change in its behavior.
David Adesnik is the director of research at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow David on Twitter @adesnik. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.