US Sanctions on Iranian Oil: The Reasons and Challenges Explained

The reasons behind the US sanctions and their effect on the major oil importers, including India.

The Trump administration reimposed economic sanctions on Iran last November.

(Photo: The Quint/ Viraj Gaur)

The United States has announced that it will no longer waive sanctions for nations buying crude oil from Iran. The waivers are due to expire in May.

The sudden move is directed at a group of nations which are Iran’s biggest clients and have previously been beneficiaries of the US waivers; India, China, Japan, South Korea and Turkey.

The US aims to reduce Iran’s oil exports to zero, thereby cutting off the Government of Iran’s main source of revenue. Iran has protested, calling the move “economic terrorism”.

The announcement has elicited knee-jerk reactions from the nations affected, not least India, which imports more than 80% of its oil needs.

Why is the US trying to cut off Iran’s oil revenue? What are the reasons behind this move and what is India planning to do?

Read on to find out:

The US Waivers

In November 2018, US President Donald Trump reinstated economic sanctions against Iran, after the infamous withdrawal from the Iran Nuclear Deal.

However, a group of eight countries were allowed to continue to import Iranian crude; India, China, Japan, South Korea, Turkey, Greece, Italy, and Taiwan.

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The US granted six-month waivers to these nations but placed a cap on the amount of oil that could be imported. For India this meant that Iran, which was previously its second largest supplier, fell rapidly to sixth place in November last year.

India and four other nations reportedly requested the renewal of these waivers, which are due to expire in May 2019, but this time, the US declined.

US and Iran: A History of Sanctions

The US has had a long history of imposing sanctions on Iran, on account of the constant diplomatic friction between the two.

The first time the US imposed sanctions on Iran was following the Iran Hostage crisis in 1979, when college students who were part of a radical Islamist group held diplomats and citizens hostage for 444 days inside the US embassy, during the Carter administration. The sanctions were lifted in exchange for the safe return of the hostages.

An import embargo on Iranian goods was imposed in 1987 by the Reagan administration, citing Iran’s support for international terrorism and its aggressive actions against trading ships in the Persian Gulf.

These sanctions were further expanded in 1995, when the Unites States banned "involvement with petroleum development in Iran," according to the US Treasury.

In 1997 the US clarified that it prohibited “virtually all trade or investment activities with Iran, by US persons.”

In 2010 and 2011 new sanctions prohibiting specific imports from Iran were rolled out.

The UN itself imposed sanctions on Iran in 2006 for allegedly running a clandestine nuclear programme. This was resolved when the landmark Joint Comprehensive Plan of Action (JCPOA), more commonly known as the Iran Nuclear Deal, was signed in 2015.

The deal subjected Iran’s nuclear programme to a system of periodic checks, in exchange for relief from economic sanctions.

Then, last year, the US pulled out of the JCPOA and reimposed unilateral sanctions.

Why Is US Lifting the Waivers?

Mike Pompeo, US Secretary of State, said that the pressure campaign on Iran was being mounted to maintain “national security objectives”.

The Trump administration had pulled out of the Iran Nuclear Deal because it felt that the deal, which was signed by the US under the Obama administration along with the UK, France, China, Russia and Germany, was ineffective in curbing Iran’s under-the-radar efforts to build weapons of mass destruction.

"The Iran deal is defective at its core. If we do nothing, we know exactly what will happen. In just a short period of time, the world's leading state sponsor of terror will be on the cusp of acquiring the world's most dangerous weapons," said Donald Trump in May 2018.

The US has made it clear that it wants to negotiate a new deal with Iran, imposing more stringent conditions. In May 2018 it listed out a set of 12 conditions which had to be met for the US to consider another deal, which included shutting down its heavy water nuclear reactors, allowing the UN nuclear watchdog, the International Atomic Energy Agency (IAEA), complete access to all sites across Iran, withdrawing its forces from Syria and ending support for the Houthi rebels in Yemen, among others.

Another factor behind the United States’ actions is its deep ties with Saudi Arabia: the US imports oil from Saudi which, in turn, imports military equipment from the US. Saudi Arabia and Iran are the two most powerful nations in the Middle east in terms of military prowess and have been waging proxy wars in the Middle east for years.

India's Countermeasures

Now that the waiver is due to expire, India needs to look for its oil elsewhere. In an official statement, the Ministry of External Affairs said, “We are adequately prepared to deal with the impact of this decision.”

Indian companies have made arrangements to ensure uninterrupted supply to their refineries; more crude oil will be imported from Saudi Arabia, Kuwait, UAE and Mexico. In the last two years they also diversified their options by purchasing stakes in several international oil companies in countries like Brazil, the United States and Canada. This is to ensure that OPEC nations do not monopolise India’s oil market and thereby wield undue power.

Rising crude oil price is another issue that India will have to address. Ever since the US announcement, oil prices have risen by more than three percent, reaching a six month high of USD 74.38 per barrel. If OPEC decides to limit production, oil prices are liable to rise further.

Addressing the concerns of the importers, many of which, like India and Japan, are US allies, the United States said that it has conversed with the Organisation of the Petroleum Exporting Countries (OPEC) nations and arranged for a smooth transition to other suppliers like Saudi Arabia and the United Arab Emirates.

“Saudi Arabia and others in OPEC will more than make up the oil flow difference in our now Full Sanctions on Iranian Oil.” Donald Trump tweeted on 22 April.

India is also looking towards the US itself for oil imports, since it can compete with OPEC prices due to increasing production. Diplomatic sources told Livemint that the US could offer a similar arrangement to the one which India currently enjoys with Iran. The details will reportedly be worked out after the waivers expire.

Who Has the Most to Lose?

Without a doubt, Iran.

China and India are the two biggest importers of Iranian oil, and oil exports are one of Iran’s main sources of revenue. The sanctions have reportedly already cost Iran USD 10 billion since Donald Trump made the announcement in May 2018.

However, the sanctions will cause problems for the importers as well. China and India will feel the biggest pinch since Iran supplies a substantial amount of their oil needs, which have been increasing steadily the last few decades.

India is planning to comply with the sanction, and has already started looking for alternatives. It is the third largest importer of oil in the world, and Iran was its sixth biggest supplier, covering nearly 10 percent of daily imports. India used to import more oil from Iran, but US sanctions in November 2018 capped the import to around 3,00,000 barrels per day.

China, who also depends on Iran for roughly 6 percent of its crude oil imports, has criticised the move, saying that the US has no jurisdiction over the matter, but whether it will stop oil trade with Iran, is yet unclear.

Japan is better placed to handle the sanctions since, unlike the other affected nations, its crude oil consumption has been falling for the last decade. It used to import nearly 5 million barrels a day, which has now fallen to about 3 million barrels. Along with consumption, crude oil imports are falling as well.

South Korea and Turkey had already begun the process of reducing their imports from Iran. South Korea had stopped in November, following the US sanctions, but restarted imports in January this year.

Turkey has been more outspoken against the United States’ stance against Iran. This is because it is Iran’s immediate neighbour to the north and stands to lose a valuable and easily accessible trading arrangement.

Greece, Italy and Taiwan used to import Iranian oil till last year but have stopped since. The lifting of the waivers will not affect them.