China, already Iran’s biggest buyer of crude oil, may increase imports from Iran in defiance of U.S. sanctions.

The strict sanctions the U.S. threatened to impose against Iran in May drove crude oil prices up almost immediately. Assurances that surplus production capacity could be drawn from other countries to replace imports from Iran are less than convincing.

Meanwhile, even U.S. allies balk at re-instituting sanctions against Iran, which would threaten the accord that curbed Iran’s nuclear program after the last round of sanctions.

China maintaining the existing nuclear accord may stabilize oil prices to some extent and help determine other countries’ positions in regards to the U.S. sanction over the next few months – but only time will tell.

Sanctions Drive Oil Prices Up, Spare Capacity May Not Suffice

Since the United States’ unilateral withdrawal from the 2015 Iran nuclear accord in May, exports from Iran have fallen from 2.7 million barrels a day to 2.2 million barrels, and prices have risen by 3.6%. This decrease in exports and increase in price occurred before the U.S. announced the more extreme position of no waivers for countries with a high reliance on imports from Iran.(1)

Assurance by the International Energy Agency that spare production capacity in other oil markets such as Saudi Arabia can make up for the decrease in supply from Iran may be overly optimistic when supply issues like labor strikes, hurricanes, technical problems, and political turmoil are taken into consideration.(2) Meanwhile, Libya and Venezuela, both major oil producers, have recently suffered significant outages, meaning global supply is already under pressure.(3)

Countries Hesitate to Comply With Sanctions

In the previous round of sanctions against Iran, concern about Iran’s nuclear program drove U.S. allies to cooperate with sanctions to help form the nuclear accord. Even countries that decried U.S. interference in Iran’s affairs, namely China and India, decreased crude oil imports from Iran to avoid sanctions levelled by the U.S. against their own countries. The U.S. granted waivers from a total import ban to India, South Korea, and Japan, all of which were heavily dependent on imports from Iran, in exchange for those countries significantly reducing imports.

The economic and political landscape has changed since then. The U.S. position is more extreme than ever, demanding zero imports of crude oil and goods from other major industries by November 4, 2018, with absolutely no waivers. However, even U.S. allies are less motivated than before to follow suit.(4)

With high oil and gasoline prices already creating ripples through economies and unhappy consumers stirring up political tension in countries like India, the idea of increasing crude oil prices makes nations around the world nervous – especially those that are more heavily dependent on Iranian oil imports, like India, South Korea, and Japan.

Meanwhile, Iran had already reduced its nuclear program in response to the previous round of sanctions, and many countries fear that if economic benefits are withdrawn, Iran will lose incentive to curb development of its nuclear program.

To enforce cooperation, the U.S. has promised punitive measures against countries that don’t follow suit with the U.S. withdrawal from the accord, including denied access to U.S. markets and dollars for companies and financial institutions of countries that don’t go along with the sanctions. European countries involved with the accord have explicitly expressed that they don’t support the U.S. sanctions. The U.S. has since softened its tone slightly by speculating about potentially allowing sanction waivers to countries on a case-by-case basis.(5) However, many nations have already begun reducing imports from Iran, and some financial institutions have already stopped backing Iranian oil-related enterprises.

China Increasing Imports Could Shift the Balance

China may be the wild card that throws a wrench in U.S. plans, but the consequences of its opposition to the sanctions are still hard to predict.

China’s comparative clout as the world’s second largest economy, the U.S. dependence on China to manage North Korea, and China’s ability to transact with Iran in yuan rather than the dollar allow China  to better weather U.S. sanctions.

China potentially stands to gain from the sanctions against Iran. Already the largest importer of Iranian crude oil, China may even increase imports from the country. The lower price of Iranian oil caused by decreased demand from other countries could allow China to afford more Iranian oil without foregoing purchases from other suppliers, like Saudi Arabia. The increased trade could also strengthen ties between China and Iran and support China’s expensive one belt, one road initiative to build a modern Silk Road pan-Asian trade route.(6)

It already appears that China cozying up with Iran wouldn’t come without consequences. While denying any tit-for-tat retaliation against China’s hesitance to cooperate with the sanctions, in the past couple of months, the U.S. has begun discussing limiting Chinese investment in U.S. technology, access of Chinese nationals to U.S. technology industries, and exports of advanced technology to China. This would stymie the Chinese government’s goal of achieving significant development in ten major advanced technology industries by 2025. Tension between China and the U.S. has risen over what some are calling a trade war.(7)

Oil prices have already gone up and could keep going up – but by how much, only time will tell. For now, we’ll just have to keep an eye on the extent to which China and other countries cooperate with U.S. sanctions.