Iranian President Hassan Rouhani attends a meeting with his Russian counterpart Vladimir Putin in Ankara, Turkey September 16, 2019. Sputnik/Alexei Nikolsky/Kremlin via REUTERS
Since May, Iran has staged attacks on the global oil market
that increased steadily in intensity. First Tehran targeted ships
in port, then
tankers in transit, and finally it
captured a British tanker and crew on the high seas. But Iran’s alleged drone
and cruise missile strikes on Saudi Arabia on September 14 were a dramatic
escalation that hit at the heart of the oil industry.
Why did Iran take such a provocative step? The answer lies
in oil politics. Iran is trying to impose a cost on the Trump administration
for its anti-Iran strategy by driving oil prices higher and sending a warning to
purchasers of Saudi oil, many of which were previously top purchasers of
Iranian crude, that their supply source is not safe.
While previously mere threats against the safety of shipping
were enough to send tremors through oil markets and spook past US presidents, Iranian
leaders have seemed powerless to respond to the Trump administration’s “maximum
pressure” campaign, which aims to force Tehran to eliminate its nuclear and
missile programs and halt destabilizing regional behavior. By threatening
buyers of Iranian crude with sanctions, the United States has reduced
Iran’s oil exports by 80 percent. Its economy is on track to contract
by 9 percent this year.
Yet, the lopsided outcome is only partially the result of a
suffocating sanctions regime. A more important factor is a glut of cheap oil. The
oil market is constantly changing, but low prices appear likely to last for at
least the next couple of years, despite a small risk premium after the
September 14 attack. First, demand growth for oil worldwide is declining.
That’s largely because of concerns about the trade conflict between the United
States and China, as well as weakening economies in the United Kingdom and
Germany. Second, oil supply remains abundant, thanks especially to the rise of
US shale production. There is so much oil, in fact, that major oil producers
such as Russia and Saudi Arabia are working together to reduce supply. Still,
the price has remained stubbornly low.
The state of the oil market was on full display during the
Iranian provocations in the Persian Gulf this summer. The goal was to put
pressure on the United States—primarily by increasing oil prices—without being
so provocative as to trigger a war. But oil prices have barely moved. If market
participants could disregard Iranian provocations, that meant Trump could as
well. Tehran likely concluded that it had to take a step that no one could
ignore.
The attacks in Saudi Arabia were not only aimed at Washington.
Indeed, Tehran is also sending a message to countries such as China and India
that it will not sit idly by while Saudi Arabia eats up its market share.
In previous confrontations with Washington, oil supplies have
been tight and prices high. That meant buyers of Iranian oil were reluctant to
abandon a key supplier. But with abundant, cheap oil on the market today, few
countries are willing to risk US sanctions to buy Iranian crude.
This is the case even with China, one of Iran’s closest
international partners and a country with which the United States is at odds on
many other issues. Beijing still imports some oil from Iran, but the volumes
are small. China is doing the bare minimum to preserve ties with Tehran without
provoking more severe US sanctions. Chinese companies are importing record
levels of oil from Iran’s nemesis, Saudi Arabia, to make up for the shortfall.
Iran’s other main buyers—India, Japan, South Korea, Turkey,
and Europe—have all made alternative arrangements. Notably, despite
long-standing political and economic ties with Iran, India has decided to ditch
Iranian oil and buy more from Saudi Arabia and others. These shifts are not
easily reversed, especially given the potency of US sanctions. Instead of
pushing these countries back toward Iran, the latest threats will further
accelerate efforts in China and India to diversify supply and to expand programs
for clean energy vehicles and alternative energy.
Trump appears reluctant to retaliate militarily against Iran for the attacks. But he also appears uninterested in offering further concessions. Without clear progress on sanctions, Tehran will likely conclude that it must continue provocative attacks. The risk is that Iran provokes not only an oil price response but a military one from Washington. Even if both sides seek to avoid it, war remains a serious risk.
Henry Rome is an Iran analyst at Eurasia Group.
Robert Johnston is managing director for global energy and natural resources at Eurasia Group and a senior fellow at the Atlantic Council Global Energy Center.
Further reading
Wed, Sep 18, 2019
The precision of the aerial attack on Abqaiq, whether it originated in Iran or outside it, shows both a willingness to target strategic critical infrastructure and a capability for extreme precision.
MENASource
by
Thomas S. Warrick
Tue, Sep 17, 2019
Trump is more than likely hoping that Saudi officials agree to economic pressure on Iran, but oppose an all-out war.
New Atlanticist
by
Kirsten Fontenrose
Mon, Sep 16, 2019
Atlantic Council experts react to the September 14 attacks on Saudi oil facilities and what it means for global energy markets and the wider region.
New Atlanticist
by
David A. Wemer
While previously mere threats against the safety of shipping were enough to send tremors through oil markets and spook past US presidents, Iranian leaders have seemed powerless to respond to the Trump administration’s “maximum pressure” campaign.
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