Iran is vulnerable to a Trumpian all-out economic assault
On November 25th the Elva, a tanker flagged in São Tomé and Príncipe, clandestinely picked up 2m barrels of Iranian crude off Malaysia’s coast. Sailing from there to north-east China, the vessel’s likely destination, usually takes two weeks at most—but not this time. On December 3rd, alleging the Elva had breached sanctions, America blacklisted the ship, exposing anyone dealing with it to punishment. Six weeks on, it is still stranded.
And the Elva has company. Since October, when the Biden administration started cracking down on Iran-linked tankers, their crude deliveries to China, which buys nearly all of Iran’s oil, have shrunk by a quarter, to 1.3m barrels per day (b/d). At the same time, loadings from Iran have continued apace, in the hope of a change of circumstances. The result is that there is now four times as much Iranian oil stranded at sea—20m barrels—most of which sits off the coasts of Malaysia and Singapore.
In the final days of the Biden presidency America is striking Russia, too. On January 10th officials announced new sanctions against 143 tankers, as well as large exporters and insurers. This will cause headaches for Vladimir Putin, and is one reason why Brent crude, the global benchmark, hit $82 a barrel on January 15th, its highest in five months. Yet it is Iran that faces the bigger threat. Although Donald Trump is ambivalent about blockading Russia, he is committed to strangling Iran’s finances. He may well succeed, and in doing so disturb global energy markets.
Joe Biden had turned a blind eye to Iran’s oil trade. Between 2018, when the first Trump administration reimposed harsh sanctions, and last year, the country’s crude exports grew 12-fold, to 1.8m b/d. Then, in October, Mr Biden changed tack. In the months since, the Treasury has added 55 tankers to its Iran-linked blacklist, equivalent to a third of the “dark” fleet tasked with carrying Iran’s crude, says Homayoun Falakshahi of Kpler, a data firm.
Black mark
Officials seem to have realised that their lenient approach towards Iran has failed. The country has been weakened not by sanctions but by Israel’s victories over Hamas and Hizbullah, as well as the fall of Bashar al-Assad in Syria. It is also close to building a nuclear weapon. Global oil supply is plentiful and demand weak, making it less likely that sanctions will hurt American consumers. Expensive petrol will, in any case, be Mr Trump’s problem.
The Biden administration is making clever use of sanctions. Most of Iran’s barrels are bought by small refiners in China’s north-east, dubbed “teapots”, which rely on cheap crude to turn a profit. The teapots sell their products at home in local currency. That makes them immune to “secondary” sanctions, which ban American firms from dealing with any company that knowingly buys Iranian oil. But they still need Iran-linked tankers to dock at Chinese ports, many of which also earn a living by shipping goods to America.
Aware of this, sanctions enforcers have targeted tankers on the last leg of an Iranian barrel’s journey, often from Malaysia to China. Fearing punishment, Chinese ports have started to reject such vessels. On January 6th Shandong Port Group, which runs ports in Qingdao, Rizhao and Yantai, among other places, banned tankers blacklisted by America. Since supply has begun to dry up, Iranian crude now trades at just a $1.50 discount to Brent, the global benchmark, compared with $6.50 three months ago. The price rise is enough to have forced some teapots out of the market, in turn curtailing demand for Iranian oil.
Iran is working hard to replace blacklisted tankers with “clean” ones. Yet the global dark fleet has grown so large—it now absorbs most of Russia’s oil exports—that doing so will take a long time, especially since Russia also needs new tankers to replace those America blacklisted last week. On top of this, China’s teapots were already struggling. A spate of larger, nimbler refineries, built this decade, are eating away at their margins. The Chinese government, which objects to their pollution, is granting them meagre import quotas.
Enter Mr Trump. As a first step, his administration could add more tankers and traders to the Treasury’s naughty list. A bigger step, which insiders say Mr Trump’s team is discussing, would be to tell China that America will place sanctions on any port receiving Iranian barrels. The most aggressive option would be to impose eye-watering tariffs on China until its government agrees to enforce a ban on imports of Iranian oil, among other conditions.
Such tactics could lead Iranian exports to fall by 1m b/d by the summer, against levels seen in 2024, says Bob McNally, a former adviser to President George W. Bush. In a relatively benign scenario the global supply surplus, coupled with spare production capacity, would keep the subsequent price rise to $5-10 a barrel.
A less benign scenario would see Iran respond by lashing out at other Gulf countries—or, worse, blocking the Strait of Hormuz, a waterway through which 30% of the world’s seaborne crude and 20% of its liquid natural gas passes. America might in turn respond by sending in its navy. Iran’s leaders have said that if they cannot export, no one else will. Once cornered, they could resort to desperate measures. The time has never been better for an economic assault on the Islamic Republic. That does not make it a safe choice. ■
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