Iran Nuclear Agreement

The Five Questions Series is a forum for scholars, government officials, civil society leaders, and foreign policy practitioners to provide timely analysis of new developments related to the advancement of women and girls worldwide.

This year, an armed confrontation between Iran and the United States or one of its allies was included as a top tier priority in the Center for Preventive Action’s annual Preventive Priorities Survey.

Despite the sharp exchanges between the U.S. and Iranian presidents at the United Nations, new negotiations may not be so far-fetched as sanctions intensify against Tehran.

The United States has reactivated sanctions against Iran that could trigger the collapse of the multilateral Iran nuclear deal.

It is often said, perhaps with some hyperbole, that Iran’s nuclear deal with world powers was the best hope for conflict resolution in the Middle East. Its architect John Kerry argues instead that the 2015 deal’s limited parameter of closing Iran’s pathway to a nuclear weapon is sufficient on the merits. The Trump administration is taking a different view, focusing on Iran’s escalating threats to U.S. allies Israel, Saudi Arabia, and the United Arab Emirates. Those threats, which have included missile, drone, and cyberattacks on Saudi oil facilities, are looming large over the global economy because they are squarely influencing the volatility of the price of oil. One could argue that the U.S. decision to withdraw from the Iranian deal, referred to as the Joint Comprehensive Plan of Action (JCPOA), has injected an even higher degree of risk into oil markets, where traders now feel that the chances of Mideast conflict resolution are lower. But, the Trump administration could argue otherwise. From its perspective, the United States extended to Iran $6 billion in frozen funds, opened the door for a flood of spare parts to be shipped into Iran’s suffering oil and petrochemical sector, and looked the other way while European companies rushed in for commercial deals. In exchange, it’s true, Iran began to implement the terms of JCPOA, but as Secretary of State Pompeo laid out in a major speech on the subject, the nuclear deal has failed to turn down the heat on the wide range of conflicts plaguing the Mideast region. Rather, Secretary Pompeo explained, Iran’s proxies have raised the stakes for U.S. allies, and regional conflicts have been dangerously escalating. U.S.-Iranian exchanges in Syria are also on the rise. The deal could still move forward, according to Secretary Pompeo, but not until Tehran addresses a laundry list of U.S. demands. Washington expects its action and rhetoric to spur more productive negotiations that would allow the United States to link restoring the nuclear deal with political negotiations to de-escalate conflicts. Since re-imposition of renewed oil sanctions doesn’t take hold for several months, wiggle room still exists for such diplomacy. But markets reflect doubt about those chances, reflecting the view of many respected commentators. Oil prices hit $80 a barrel and even the five-year forward oil price rose above $60 for the first time since the end of 2015. Speculators are still holding substantial long positions and industry has been slower to hedge, lest oil prices go higher still. In the world of oil, it’s hard to compartmentalize complex geopolitical conflicts. In condemning the Trump administration’s move, Iran’s hardliners actually accused the United States of withdrawing from the JCPOA to raise the price of oil and called on the Organization of Petroleum Exporting Countries (OPEC) to raise its production to resist the United States. In a tweet from the Iranian Oil ministry via @VezaratNaft on May 11, Iranian oil minister Bijan Namdar Zangemeh is quoted as saying “President Trump playing double game in oil market. Some OPEC members playing into U.S. hands. U.S. seeking to boost shale oil production.” Simultaneously, Iranian media promulgated a spurious rumor that Saudi leader Crown Prince Mohammed bin Salman had been assassinated. The context for both was dialogue between the United States and its regional Arab allies (kicked off by a Trumpian tweet on OPEC) on the need to cool off the overheated oil market with higher oil production to ensure that the re-imposition of sanctions did not destabilize markets further. In seeking “better terms” for the Iranian nuclear deal, the Trump administration is counting on the fact that the Iranian government faces more internal opposition from its population than it did when the deal was negotiated back in 2015. That popular discontent is palpable and explains why the Iranian rhetorical response to the U.S. withdrawal announcement has been relatively mild compared to historical precedents. But this is no cakewalk, since Iran is counting on Europe and other major trading partners to resist U.S. sanction efforts.   In recent years, China has established its own networks of financial channels and institutions that could be used to allow Chinese companies to pay Iran in its currency, the yuan, in a manner that avoids the Brussels-based SWIFT financial messaging system, which can be subject to U.S. tracking and intervention. China has already tested using the yuan to pay for imports from Russia and Iran via China National Petroleum Corporation’s Bank of Kunlun. The Tehran-based business daily The Financial Tribune suggested that other countries, including Europe, could tap “alternative Chinese financial networks.” But the practicalities of China taking the lead on behalf of Tehran when other U.S.-China bilateral trade issues loom large is more complicated now than it was back in 2012. In 2012, China agreed to meet the Obama administration’s request that it cut its Iranian imports by the minimum 20 percent. As robust a response as the United States may now say it wants from Beijing on Iran, Washington similarly has to consider other priorities on the table with China right now, including negotiations regarding North Korea. Iran has been exporting roughly two million barrels a day (b/d) of crude oil. Europe purchases over a quarter of that volume and is—if push comes to shove—likely to go along with U.S. policy if no diplomatic progress can be made. For now, European leaders are trying diplomacy to keep the nuclear deal alive separately from the United States and to press Iran to address some of the common concerns on Secretary Pompeo’s list. Back in 2012, Europe cut virtually all of its oil imports from Iran. Japan had already conservatively lowered its purchases from Iran in March and even India’s oil giant IOC is now saying publicly that it is looking for alternative barrels to replace its 140,000 b/d of purchases from Iran, suggesting the oil will be made available to India from Saudi Arabia. South Korea is also expected to wind down its purchases from Iran given the imperative to display common ground with the United States; Seoul has already reduced purchases from 360,000 b/d last year to 300,000 b/d more recently. In sum, although Iran can conduct oil for goods barters with Russia and Turkey, it could potentially lose one million b/d of sales or more, if it the current geopolitical stalemate stands. But more is at stake for Iran than short run oil sales since Tehran has learned it can get those back eventually if the political will towards sanctions wears off over time. The curtailment again of international investment in its natural gas industry is a bigger setback for Tehran, which needs natural gas not only to inject into its oil fields to drive production but also for residential and commercial use. If the United States manages to drive French firm Total back out of the important South Pars natural gas venture, the chances of Iran reestablishing itself as a major liquefied natural gas (LNG) exporter dissipates once again, possibly this time for decades given potential U.S. exports and other market conditions. China, which is also an investor in South Pars, does not have experience developing LNG exporting projects. Unfortunately, the global natural gas stakes could make it harder to draw Russia along with any U.S.-led conflict resolution effort. Even if Tehran was willing to cooperate in Syria or Yemen, Russia—a major natural gas exporter to Europe and Asia—benefits from U.S. sanctions that block competition from Iranian exports. Motivating the Kremlin into any diplomatic deal that restores U.S.-Iranian cooperation could be a heavy lift.   Russia is expected to begin supplying natural gas by pipeline to China via the Power of Siberia pipeline by late 2019 but Russia’s Gazprom has had difficulty locking down sales to China from additional pipeline routes. Successful negotiations on the Korean peninsula could help in that regard, since one potential fix to North Korea’s energy needs could be a Russian gas peace pipe. But the availability of direct natural gas exports to China and South Korea from the United States muddies the waters further. Beyond holding Iran out of the long run natural gas market, Russia could similarly be unwilling to agree to conflict resolution in Yemen and Syria because of the benefit it enjoys from keeping Saudi Arabia under financial and political pressure. Riyadh’s economic pressures, driven in part from its high military spending in Yemen, have made Saudi Arabia all the more willing to collaborate with Moscow on managing oil markets—a geopolitical reality that has strengthened Russia’s global standing significantly. It’s hard to see what would motivate the Kremlin to let Saudi Arabia off the hook given that a resumption of a tight alliance with Washington and Qatar is a material danger to Russia’s geopolitical and economic well-being, as demonstrated when the three countries collaborated in the early 2010s to weaken Moscow’s grip on European energy markets. Russia’s posture is not the only barrier, however, to conditions that would allow progress on U.S.-Iranian conflict resolution. Even if the economic penalty of the re-imposition of U.S. sanctions were sufficient to motivate Iran back to the negotiating table, it remains unclear to what extent Tehran can influence its own proxies who have independent goals that could not align fully with any conflict resolution deal Iran could strike with the United States and its allies. Moreover, it is similarly unclear whether the United States could draw Saudi Arabia into a workable political settlement for Yemen. Thus, while the United States could have a strategy in mind that could improve upon the status quo in the Middle East, a deeper dive into the energy realpolitik of the matter shows the complexities that stand in the way of progress. With so much at stake, an incredibly disciplined and patient hand will be necessary to work through the wide host of internecine, interconnected issues.  

Tehran could respond to the U.S. withdrawal from the Iran nuclear deal with cyber operations against U.S. companies. If it does, that might give the hawks in the White House the excuse they need to trigger a military confrontation with Iran. 

In any future talks on the nuclear program, the United States can’t exclude Iran’s regional behavior from consideration.

Iran could restart aspects of its nuclear program if President Trump declines to renew sanctions waivers this month, leaving major powers with few options for monitoring or restricting it.

During his visit to the United States, Saudi Crown Prince Mohammed bin Salman inopportunely noted in an interview with Reuters news service that Saudi Arabia was “working on moving from a model agreement [for oil collaboration with Russia] for a year to a longer term—10-20 years.” In fairness to the Saudi leader, he could have imagined that the oil market stability implied by a long lasting oil deal with Moscow would be welcome news to the White House, whose energy dominance policy (and many U.S. jobs) depends on the economic success of the American shale boom. After all, the goal of a permanent oil alliance with Russia would be to eliminate the costly boom and bust cycle in oil that both destabilizes Saudi Arabia and underpins the historical cycle of global financial crises.  But last week when the details of what continued OPEC-Russian cooperation on oil could look like emerged, that is, oil prices nearing $80 a barrel or even $100, President Trump took to Twitter to make clear his view. “Looks like OPEC is at it again…” the President tweeted. “Oil prices are artificially Very High! No good and will not be accepted!”  Significantly, the President’s tweet did not come in the immediate aftermath of the Crown Prince’s interview with Reuters on decadal oil agreements with Russia or even after private indications of the Crown Prince’s hope that oil prices would rise to $80 a barrel to help along his initial public offering (IPO) of Saudi Aramco. The backdrop to the President’s first tweet about OPEC came as OPEC and non-OPEC ministers began their scheduled meeting in Jeddah amid overly ambitious statements about lofty oil price goals. Saudi oil minister Khalid al-Falih, in particular, galled some long time oil commentators by declaring, “I haven’t seen any impact on demand with current prices,” and added for emphasis that the world has more “capacity” for higher oil prices given declines in the energy intensity of global economic growth. The minister’s comment echoed similar Saudi statements made in 2006 just before the economically crippling rise in oil prices to $147 a barrel. Highly respected Bloomberg oil strategist Julian Lee's article with a chart showing that history was tweeted out with the apt twitter caption: “Down in Saudi Amnesia, They’re partying like it’s 2008.”  As often with President Trump’s tweeting, it has put forth a firestorm of commentary reading between the lines. Let’s break such speculation down, idea by idea. First is the issue that the White House was probably working on the assumption that his U.S. tour had convinced the Crown Prince to delay his IPO plan. The IPO has been an albatross around the neck of Saudi oil policy, which the White House might think needs greater maneuverability. That’s on top of the fact that $100 oil isn’t a solution to the problem of marketing 5 percent of the Saudi state oil firm. Markets would certainly not believe $100 was sustainable, even if that price could be reached again briefly. Such high prices even worry the U.S. shale industry. “We are going to lose demand. It’s going to move more toward alternative energy,” was how Scott Sheffield, chairman of the board of shale powerhouse Pioneer Natural Resources characterized $70 or $80 oil in response to a question from the moderator of an energy conference panel last Thursday.  Secondly, in constructing his OPEC tweet, the President could have been thinking about the important series of decisions that are on the U.S. president’s agenda for May, any one of which could affect oil markets. Most important, the United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. Historically, the Saudis have strategically increased oil production ahead of U.S. undertakings that might be a risk to oil market stability. Notably, they offered that courtesy to President Obama back when stronger sanctions were being mooted on Iran to pressure Tehran to accept negotiations towards a nuclear deal. Washington is also considering additional punitive measures against Venezuelan leader Nicolas Maduro, who has dismantled democracy and fostered a domestic humanitarian crisis through failed economic policies. Saudi Arabia has been mum on increasing production, should Venezuela's oil production problems get worse. If President Trump typed in his tweet just after his morning intelligence briefing, he could also have been thinking about the lack of wisdom for Saudi Arabia to be tightening the global oil market against the backdrop of the escalating Saudi military campaign against Iranian backed, Yemeni militias, which has increasingly put regional oil and gas facilities and trade routes at risk to asymmetric warfare. Saudi defenses recently foiled a Houthi drone that threatened the Saudi oil refinery at Jizan.  But there is no question that President Trump is aware that important U.S. geopolitical decisions that could affect oil prices are coming in the month of May, the kickoff to the U.S. summer driving season. The anti-OPEC tweet was presumably popular with the President’s base who care deeply about gasoline prices. That begs the question: Would a return to relatively high oil prices still hurt the U.S. economy? The answer is yes, but like many things, it’s complicated.  Energy economist James Hamilton, who is among the most cited academics on the subject of oil price shocks and the U.S. economy, noted in a pivotal 2009 paper that the high oil prices of 2007-2008 had significant effects on overall consumption spending and especially on purchases of domestic automobiles. With Detroit increasingly offering U.S. consumers high profit margin, gas-guzzling SUVs, high oil prices could be problematical for American car makers. Hamilton concluded that the 2007-2008 period of high oil prices can be added to “the list of recessions to which oil prices appear to have made a material contribution.” Along similar lines, economists at Deutsche Bank are forecasting that higher gasoline prices would erode the financial benefits low-income households gained from the tax cuts.  The other problem with rising oil prices is that they can create a deterioration in consumer sentiment, by signaling the possibility of economic slowdown or crisis. Research shows that there is a significant negative correlation between gasoline price increases and perceptions of individual well-being in the United States. With U.S. mid-term elections around the corner, Republicans could find it tougher to sell the President’s economic agenda in a sharply rising gasoline price environment.  Economic research from the U.S. Federal Reserve shows a more nuanced picture for oil prices in recent years, as the shale boom has been found as a driver to increased employment across many regions of the United States (Decker, McCollum, Upton Jr.) Fed economists have also touted improving energy efficiency and better monetary policy as an important factor that will inhibit negative economic effects from rising oil prices. But so far, the recent oil price rise has been gradual and has yet to hit tipping point levels that have, in past times affected consumer driving behavior.   If OPEC doesn’t heed the U.S. President’s call for more moderate intervention in oil markets, President Trump has several policy options at his disposal that go beyond twitter. The U.S. administration could opt to “loan” heavy oil from the U.S. Strategic Petroleum Reserve to specific U.S. refiners to protect them from any loss of supply from the deteriorating situation in Venezuela or the imposition of sanctions. Such a policy could be beneficial in two ways, by at least temporarily shielding American consumers from worsening supply problems in Venezuela and by replacing at the margin a similar quality of oil that has not been forthcoming from Saudi Arabia. It would also give the president political gains as being proactive on the domestic gasoline front, something several of his predecessors have done in similar circumstances.  More controversially, President Trump could choose to accommodate French President Emmanuel Macron by delaying a decision on Iran beyond May, waiting instead for the next decision juncture, which will come in July. Such a decision could be justified as giving European allies time to try to “fix” the Iran deal, before a final decision is taken whether to scupper it. That would also give the administration time to test whether it could press for a political fix to de-escalate the conflict in Yemen, leaving open a possible incentive for Tehran for cooperating. But any broader Mideast negotiation will invite Russian interference, which will be hard to counter without some assistance from U.S. Gulf allies who might leverage their close relations with Moscow on oil – hence yet another reason that President Trump’s tweet was strategically well-timed.