The Roadmap to Further Pressure Tehran’s Oil and Gas Industry

The president of the Statistical Center of Iran announced last week that Iranian GDP contracted 7.6 percent in the first three quarters of Persian calendar year 1398, which correspond roughly to the last nine months of 2019. According to the Statistical Center, Iran’s non-oil-and-gas GDP remained stable, which means that the non-oil-and-gas sector of Iran’s economy may have adjusted to the current level of sanctions pressure from the United States.

Iran’s new Statistical Center data are consistent with the finding by the International Monetary Fund (IMF) that Iranian GDP contracted more in 2019 than it did a year earlier. The IMF estimated last October that Iran’s economy would shrink 9.5 percent in 2019, as compared to 4.8 percent in 2018. The Statistical Center has reported 4.7 percent negative growth for Persian calendar year 1397.

The stability of non-oil-and-gas GDP means Iran’s economic contraction has been driven by weaker numbers for the extraction of oil and natural gas. Losses in those sectors may have reached a plateau, however. If so, Iran’s economy as a whole may have stabilized, which would be consistent with the IMF estimate for 2020 of zero percent growth in Iranian GDP.

In the absence of continuing economic contraction, the Tehran regime may not feel substantial pressure to negotiate with Washington. The Trump administration describes its policy toward Iran as one of maximum pressure, yet there are still many options at its disposal for ratcheting up sanctions on Iran’s oil and gas sector.

First, Washington could work to convince China to stop buying oil from Iran. Due to sanctions, Iran now exports less than 300,000 barrels per day, although estimates vary significantly. This is down from an average of 2.4 million barrels per day before the United States withdrew from the 2015 Iran nuclear deal. Almost all of Iran’s remaining exports go to China and Syria. The Chinese ambassador to Tehran said his country is the only one buying oil from Iran, which is likely true, insofar as Tehran sells to Damascus on credit even though Damascus has no apparent means of paying off its loans.

Data from China’s Customs Organization shows that it bought $7 billion of crude oil from Iran in 2019. Still, one cannot know how much oil China is really buying from Iran, given that the data does not include the re-export of Iranian oil to China through a third country. As part of ongoing trade negotiations with China, the Trump administration could push for an end to its purchases from Iran. If Iran’s oil exports drop further, it may have to reduce production once it exhausts its ability to store unsold oil on either sea or land.

Second, the U.S. Treasury Department can be much more aggressive in punishing those who facilitate Iran’s petrochemical exports. Since oil is the primary input for the petrochemical industry, restricting these exports would tax Iran’s storage capacity even more, effectively killing two birds with one stone.

Third, Washington should target Iran’s exports of natural gas, which go mainly to Iraq and Turkey. Iranian sources claim gas exports to Iraq alone may be worth around $3.5 billion per year. Iran’s gas industry is already feeling the effect of sanctions, thanks both to a lack of investment and a drop in oil production.

Finally, Washington could further squeeze Iranian production by strictly enforcing existing sanctions on the transfer of technology and materials related to oil and gas production. Furthermore, by creating a strike fund, Washington could quietly provide financial support to Iranian workers in key industries, including the energy industry, who are inclined to strike but concerned about being able to provide for their families.

Washington’s maximum pressure strategy has had severe macroeconomic and fiscal consequences for Tehran’s clerical regime, but the pressure remains far from its real maximum.

Saeed Ghasseminejad is senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where David Adesnik is director of research and a senior fellow. They both contribute to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Saeed, David, and CEFP, please subscribe HERE. Follow Saeed and David on Twitter @adesnik and @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.