US Aims to Crush Iranian Oil Sector, While Avoiding Harm to Oil Markets?

John Glaser

The Obama administration wants to sanction Iranian oil without negatively effecting global oil markets. No, seriously:

The White House said on Thursday the Iran sanctions proposed by Congress and signed by President Barack Obama should be enforced in a way that does not hurt the United States’ allies or disrupt oil markets.
“We want to make sure that the implementation of those sanctions is handled in a way that does not inadvertently do any harm to our allies or to the oil markets,” White House spokesman Jay Carney told reporters.

But a recent Energy Brief from the Council on Foreign Relations concludes that is wishful thinking. The U.S.’s efforts “to sanction Iran’s crude oil exports,” says the CFR report, “has already pushed Iran to threaten ”to disrupt the flow of oil through the Strait of Hormuz, the world’s most important oil chokepoint, through which nearly seventeen million barrels per day (mb/d), or about 35 percent of seaborne traded oil, moves.”

The escalation has already added a significant, perhaps five to ten dollars per barrel, risk premium into the price of crude oil. The prospect of any further “Iran premium” on oil prices deeply troubles U.S. and EU officials, given the fragile global economy. Currently, they are designing sanctions to minimize the risk that Iran’s exports will be reduced, since that would raise global oil prices. Instead, sanctions would aim at reducing what Iran earns on its sales. Nevertheless, market participants are concerned that the standoff will escalate beyond limited sanctions and disrupt physical supply at a time when the Organization of Petroleum Exporting Countries’ (OPEC) spare capacity is insufficient to comfortably offset the loss.

The report lays out four scenarios and the deleterious effects each of them would have on oil markets and the economic outlook:

• Partial sanctions on Iran’s crude oil exports; Iran harasses gulf production and shipping
• Complete or nearly complete sanctions on Iran’s exports
• An Israeli or U.S. attack on Iran’s nuclear facilities, but no oil infrastructure damage or disruption
• A regional conflict, including temporary closure of the Strait of Hormuz

All of these possibilities carry dangerous consequences generally, and specifically on oil markets. The last scenario, the report says, “would dwarf any disruption in modern history.” So much for Obama’s cautious approach.