By Nick Cunningham, a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. Originally published at OilPrice
U.S.-Iran tensions are once again heating up, even as Iran has so far managed to stabilize oil exports at lower levels.
Iran has officially breached the limits of low-enriched uranium as part of the 2015 nuclear deal, according to inspectors with the International Atomic Energy Agency. A few weeks ago Iran announced its intention to increase uranium stockpiles, stating that it no longer made sense to remain in an agreement that the U.S. has already pulled out of. There is also little to gain for Iran to continue to adhere to the nuclear deal if it nonetheless faces crippling U.S. sanctions.
As a result, the Trump administration’s stated desire of its “maximum pressure” campaign – to constrain Iran’s nuclear ambitions – is predictably having the opposite result.
On Monday, the White House issued a statement, calling Iran’s decision “a mistake,” before bizarrely claiming that there “is little doubt that even before the deal’s existence, Iran was violating its terms.” Then, the statement went on to say: “We must restore the longstanding nonproliferation standard of no enrichment for Iran,” which, to be clear, was not the standard in years past.
Iranian foreign minister Javad Zarif mocked the statement on Twitter.
— Javad Zarif (@JZarif) July 2, 2019
For his part, President Trump has gone back and forth, warning last month that Iran faced “obliteration” if the two went to war, while also saying that he was willing to meet and negotiate with Iran without any preconditions. He also notably pulled back from a military strike last month, to the chagrin of some hardliners in Washington. On Monday, as Iran breached uranium stockpile limits, Trump said Iran was “playing with fire.”
Notably, China and some officials from Europe were not pleased with Iran’s decision to breach limits of the nuclear agreement. French President Emmanuel Macron expressed “his attachment to the full respect of the 2015 nuclear accord and asks Iran to reverse without delay this excess, as well as to avoid all extra measures that would put into question its nuclear commitments.” Last week Macron warned Iran’s President that violating the terms of the nuclear agreement would be unwise. The UK voiced similar concerns.
Europe has tried to offer enticements to keep Iran within the terms of the nuclear deal, setting up a special financial entity to allow European companies to continue to do business with Tehran. But Iranian foreign minister Zarif said that the efforts are insufficient, especially since it does not allow Iran to continue to export oil. “The Europeans’ efforts were not enough, therefore Iran will go ahead with its announced measures,” Zarif said last week, referring to its plans to breach the stockpile limits.
On Monday, he went further. “Our next step will be enriching uranium beyond the 3.67% allowed under the deal,” he said. “The Europeans have failed to fulfil their promises of protecting Iran’s interests under the deal.” However, he also noted that Iran’s actions were “reversible,” suggesting that Iran could pullback if European efforts proved more fruitful.
“Without oil deal, it’s very clear, Instex will not work,” Iran’s oil minister Bijan Namdar Zanganeh said in a Bloomberg Television interview in Vienna on Tuesday, referring to the financial vehicle setup by the EU.
But the U.S. maximum pressure campaign makes it very difficult for either side to find a way to deescalate. In fact, there is a certain self-fulfilling logic that hawks in Washington are doubtlessly counting on. By ratcheting up the pressure to such an intense degree, it leaves Iran little choice but to bail on the nuclear deal and pursue more confrontational measures. That, in turn, paints Iran as the villain, which may erode support for Tehran.
Russian energy minister Alexander Novak said on Tuesday that Iran was not at fault. “As regards restrictions on Iranian exports, we support Iran and we believe that the sanctions are unlawful; they have not been approved by the UN,” Novak told CNBC’s Dan Murphy in Vienna, according to a translation.
Yet, it is clear that European governments, which have gone to bat for Iran, are losing faith in the nuclear deal and are feeling pressure to denounce Iran’s enrichment plans, which they did in a series of official statements. Time is running out. A “deadline that Iran set for Europeans to ensure the sale of oil will expire at the end of this week,” Commerzbank wrote on Tuesday. “Following that deadline, Iran intends to suspend further sections of the nuclear agreement, which could prompt Europeans to adopt the hardline US sanctions route and thus result in a further decline in Iranian oil exports.”
Iran’s gamble that its own escalatory moves will force Europe into action may have the opposite effect. As such, the current dynamic has the U.S. and Iran on a course of escalating tension, with minimal chance of a resolution.
Still, despite the heightened tension, Iran has managed to keep oil exports from collapsing to zero. As the New York Times reported, some oil tankers have recently resorted to switching off their transponders as they enter the Persian Gulf, likely loading up with Iranian oil and then heading out towards markets in Asia. The U.S. has threatened companies that violate sanctions, but so far it has been unable to take Iran’s oil exports to zero, as promised.
According to the IEA’s June Oil Market Report, Iran’s oil production was 2.4 million barrels per day in May, down 210,000 bpd from a month earlier. Exports fell more sharply to 810,000 bpd, down 480,000 bpd from April. “The final destination of Iran’s oil exports is becoming increasingly difficult to track after the National Iranian Oil Co (NIOC) shut off the satellite tracking systems on its ships,” the IEA wrote. “Most of the barrels are expected to wind up in Asia, although it is still unclear where, and some oil is probably moving into storage tanks.”