New Oil Sanctions for Iran: An Effective Policy Tool?

On Tuesday, March 3, Israeli Prime Minister Benjamin Netanyahu addressed a rare joint session of the U.S. Congress as part of an invitation issued by Speaker of the House John Boehner. His remarks celebrated the long history of cooperation between the two historical allies, but the timing of the speech suggested a more pressing priority. With ongoing talks between the P5+1 (The U.S., U.K., France, China and Russia, plus Germany) and Iran on the future of its nuclear program revealing little about the contents of a proposed deal, Israel is urging the United States to keep all its options on the table in terms of economic sanctions, especially in this period of depressed oil prices. Those in favor of a more aggressive approach to the current Iran negotiations, including Israel, want to see the threat of expanded sanctions used more powerfully as a lever to convince the Islamic Republic to abandon its nuclear weapons program. Sanctions may target a variety of sectors in the Iranian economy, including finance, petrochemicals, and oil exports. Measures already in place are largely responsible for the country’s rapid decline in oil exports, from nearly 2.5 million barrels per day at the end of 2011 to under 1.5 mbd in May 2014. A new intelligence brief from the Columbia Center on Global Energy Policy seeks to break down the economic effects of additional sanctions on Iran’s oil industry—and their ability to influence the negotiating process. In the report, author Richard Nephew illustrates that non-oil revenue has increased relative to oil export dollars as the Iranian government retools its economy to weather current sanctions. In fact, with oil at $50 per barrel, non-oil trade actually outweighs oil export revenues, at $1.77 million in non-oil trade, compared to $1.5 or $1.6 million for oil. Of course, any ratcheting down of sanctions on oil sales from Iran would surely have some effect, but the damage may have already been done to Iran’s oil export revenues; it’s unclear how powerful additional sanctions will be. In effect, the report warns that diminishing returns on sanctions as currently designed might not produce significantly more leverage at the negotiating table for the P5+1. The reason that so much of this leverage has been depleted is illustrated in a SAFE Intelligence Report published in December 2014 that dovetails nicely with Nephew’s conclusions. In December, SAFE’s analysis predicted a significant drop in Iranian oil export revenue of $10.2 billion in 2015—a decrease of 25 percent year-over-year. In 2011, before the oil sanctions were in place, Iran was benefitting from nearly $100 billion annually in oil revenue. The chart below, from SAFE’s report, illustrates the magnitude of foregone oil revenue that Iran’s economy has already endured. From 2012-2014, Iran missed out on nearly $150 billion in oil revenue, which would have roughly doubled their earnings over the same period. Under current conditions, SAFE projects that in 2015 Iran will only bring in about $40 billion in oil revenue—less than half of 2011’s levels. Under these circumstances, it’s no wonder the country has found alternative sources of revenue. Furthermore, Iran knows that any additional effort to push its crude onto the market, according to the SAFE brief, may have a counterproductive effect in this period of oversupply, depressing prices further and possibly offsetting any monetary gains altogether. The current price environment weakens the state’s ability to fuel economic growth with increased oil exports, perhaps applying additional pressure, sanctions notwithstanding. However, since Iran has not yet been driven to capitulate, it appears evident that sanctions on its oil sector may not be enough. Low revenues due to market conditions are compounded by the effect of sanctions already in place, forcing Iran to explore other options for growth. In his report, Nephew adds, “Indeed, the fact that Iran is already existing on limited oil revenues, due to U.S. sanctions that restrict access to them, may help Iran insulate itself from any future sanctions pressure by forcing it to prioritize humanitarian trade over other national trade desires.” Any plan to further increase sanctions on Iran will require a well-constructed strategy that takes these factors into account, the author concludes. In the event a deal is not reached on the country’s nuclear program, it will be important to address specifically what sectors of the Iranian economy are most vulnerable to increased sanctions if they are to be applied. In the case of oil, the U.S. may have already exhausted its leverage, at least in the short term. This corroborates SAFE’s earlier findings on the topic that although the P5+1 may be more willing than ever to tighten sanctions against Iran’s energy sector, such an approach may no longer be relevant. SIPA’s issue brief is available in its entirety here.