The US House of Representatives approved a bill at the beginning of this month aimed at completely closing off Iranian petroleum exports. Not since President Roosevelt told Japan in July 1941 that he was going to cut it off from American petroleum has the United States threatened to use oil to strangle a country so completely. And FDR’s threat caused the Japanese to decide to take Indonesia away from the Dutch, which required crippling the US Pacific Fleet at . . . Pearl Harbor.
The bill is intended as a slap in the face of the incoming president, Hassan Rouhani, who has pledged more cooperation with nuclear inspectors and says he will allay the anxieties of the West concerning Iranian enrichment.
Among the more effective lobbies for this Congressional war on Iranian oil (which is arguably an act of war in international law) is the uber-hawkish, pro-Israel “Foundation for Defense of Democracies”, the three biggest funders of which are Sheldon Adelson, Home Depot CEO Herman Marcus, and hedge fund billionaire Paul Singer, all of them also big backers of Republican politicians. In other words, the US financial blockade of Iranian petroleum is being pursued for purposes of Israeli security. Congress is attempting to punish Iran economically into mothballing its civilian nuclear enrichment program, which Israel and the US Israel lobbies maintains is aimed at producing a nuclear weapon (there is no firm evidence that Iran has a nuclear weapons program and the International Atomic Energy Agency inspectors continue to affirm that no uranium has been diverted to military uses). Israel itself is estimated to have as many as 400 nuclear warheads, as many as China, but unlike Iran, Israel does not permit IAEA inspections and it refuses to sign the Nuclear Non-Proliferation Treaty.
Congressional sanctions have already in the past 12 months reduced Iranian petroleum exports by half from an average of 2.2 million barrels a day last year. They succeeded by threatening importing countries with third-party US Treasury Department sanctions if they did not reduce their oil imports from Iran. (I’m not sure these threats are legal under the World Trade Organization’s rules).
There is some evidence that Congress is over-reaching and that not only is its new goal of zero Iranian petroleum exports not attainable but that Iranian exports may rebound somewhat. Some of the fall in exports this year is unrelated to the US, for instance in late winter Iran was engaged in a dispute over prices with China, its number one customer. Exports increased in July to 1.16 mn barrels a day up from 960,000 in June.
A further US financial blockade on Iranian oil would likely cause world gasoline prices to rise, hurting global economies and eliciting howls of outrage from American allies. In part because of the missing million barrels a day from Iran, Brent crude is around $108 / barrel, which is historically very high. Problems with North Sea production and oil workers strikes in Libya have taken some other production off line and raised prices. The world produces roughly 86 million barrels a day of petroleum, but the high prices suggest that it wants more than that. Some governments may be secretly buying up petroleum to increase their strategic reserves.
India looks set to defy the US by increasing its imports of Iranian petroleum. Those imports had fallen dramatically in April and since because European insurance firms, fearful of incurring US sanctions themselves, stopped insuring Iranian petroleum exports to Indian refineries. The Indian government, however, may step in to offer the insurance itself. Iran is also offering to insure.
India’s rupee has fallen 11% in value in the past year, in part because it is running a budget deficit so big that it worries currency traders. (Governments that spend more money than they take in make up the difference by printing extra money. Since that extra money is not backed by any real increase in productivity or the production of goods or services, it serves to dilute the value of the currency against other currencies.).
When the rupee declines in value it makes imports (often denominated in US dollars) more expensive. Hence, India’s bill for imported petroleum went up starkly this year.
Iran, on the other hand, has offered to let India pay for its oil in rupees (which locks Iran into spending that money on imports from India, since the rupee is not a hard currency and wouldn’t be accepted by most other states). If India buys more of its oil from Iran in rupees at this point, it will essentially be saving itself 11% on the price. In addition, its economy will benefit when Iran spends the rupees on Indian imports.
India’s fuel crisis is sufficiently severe for the country to risk a tiff with the US over the oil imports from Iran. India still does relatively little business with the US, and apparently the ruling Congress Party feels it can risk the wrath of the US Israel lobbies better than it can risk the fury of the Indian electorate.
Some of Iran’s problems came from the unwillingness of tanker companies to risk US retaliation by carrying Iranian oil. Iran therefore has bought from China 12 huge oil tankers, each of which can carry 2 million barrels of petroleum. Iran just took delivery of 4 more of these tankers. It will therefore be in a position over coming years to export to China and India with its own tankers, holding itself harmless from Congressional sanctions.
At the same time, China says it will abide by UN sanctions against Iran, but sees no reason to conform to arbitrary sanctions applied unilaterally by the US.
US sanctions against Iran are hurting its standard of living and hitting its middle classes. Over time the country could see downward mobility, as happened in Iraq under US/ UN sanctions. A weakened middle class will increasingly find it impossible to defy a strong state (as also happened in Iraq). Likewise, punitive sanctions on Iran will weaken Rouhani, who has slight reformist tendencies, in favor of his hard line opponents.
The main effect of US sanctions is to strengthen the state against potential challengers.