USA and Iranian flags are seen in this illustration taken, September 8, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
Potential Effects of Stricter Iran Sanctions on Oil Prices
A stricter stance on Iran could help support global oil prices by limiting Iran’s oil output. However, other potential Trump policies could offset this effect, including efforts to boost U.S. domestic oil production and impose tariffs on China, which could reduce global economic activity and demand for oil.
“Trump cuts both ways for oil prices,” stated Clay Seigle, an independent energy strategist based in Houston. Seigle noted that tariffs and trade wars could lead to a decline in U.S. gross domestic product, and consequently, reduce oil demand.
Rising Iranian Oil Exports and Past Sanction Policies
In recent years, Iran’s crude exports have reached their highest levels in years as the country has found ways to circumvent punitive sanctions. Trump initially re-imposed sanctions on Iran during his first term, following his withdrawal from the 2018 nuclear agreement with Tehran. Trump recently argued that the Biden administration’s less stringent enforcement of these sanctions has allowed Iran to increase its oil sales, generate revenue, and expand its nuclear and regional activities.
Jesse Jones, head of North American upstream at Energy Aspects, remarked that a return to Trump’s “maximum pressure” approach on Iran could potentially result in a reduction of approximately 1 million barrels per day in Iranian crude exports. “This could be accomplished relatively quickly without requiring additional legislation, simply by enforcing existing sanctions,” Jones explained. ClearView Energy Partners, a research group, has projected that these measures could remove between 500,000 and 900,000 barrels per day from global markets.
Challenges of Enforcing Sanctions Amid China’s Continued Oil Purchases from Iran
A more stringent approach to Iran also implies addressing China’s substantial oil imports from the Islamic Republic. As Iran’s largest oil customer, China does not recognize U.S. sanctions on Iranian oil and may resist pressure from a renewed Trump administration to halt purchases.
Richard Nephew, a Columbia University professor and former U.S. deputy special envoy for Iran, highlighted the complexities of this situation: “The million-dollar question is how much financial pressure the U.S. is prepared to place on Chinese financial institutions.” Nephew added that China might respond by strengthening its partnerships within the BRICS nations—Brazil, Russia, India, China, and South Africa—potentially reducing reliance on the U.S. dollar for oil and other trade.
Trump’s Views on Sanctions and Potential Impacts on Dollar Dominance
Trump has expressed ambivalence about sanctions’ long-term effects on U.S. economic influence, especially the dollar’s dominance. Speaking at the New York Economic Club in September, Trump addressed this concern: “I used sanctions effectively, but they have long-term costs. You can lose influence with sanctions if they hurt the dollar’s position.” Trump added that he strategically imposed and lifted sanctions quickly to balance effectiveness with economic impacts.
China and Iran have established a trade system that primarily uses Chinese yuan, bypassing the U.S. dollar and reducing exposure to U.S. financial regulators, making sanctions enforcement more challenging.
The Complex Interplay of Tariffs and Oil Market Dynamics
Stricter enforcement on Iran could create upward pressure on oil prices, though analysts warn this effect could be offset if Trump pursues protectionist policies, such as broad tariffs on U.S. imports to bolster domestic manufacturing. Trump has suggested blanket tariffs of up to 60% on goods from China, which some analysts argue could strain U.S. economic growth, reduce oil demand, and put downward pressure on oil prices.
“A trade war that reduces GDP would likely lower oil demand and put downward pressure on prices,” Seigle added.
Potential Easing of Sanctions on Russian Oil
Ed Hirs, an energy fellow at the University of Houston, suggested that a Trump administration might also ease sanctions on Russia’s energy industry, which were imposed by Western countries in response to Russia’s invasion of Ukraine. Trump has pledged to “settle” the war in Ukraine, which could lead to relaxed restrictions on Russian oil exports.
Currently, Western sanctions on Russian oil aim to limit, but not halt, oil flows, capping prices at $60 per barrel for shipments using Western maritime services. These sanctions have redirected Russian oil sales away from Europe to markets in China and India, increasing logistical costs for Russia.
If Trump were to reduce these sanctions, it could potentially expand global oil supply from Russia, affecting international oil prices and market dynamics.
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