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Ideas & Debate

Iran sanctions likely to push up prices of oil from November

US President Trump
US President Trump looks determined to economically (and even politically) upset the nation of Iran. FILE PHOTO | NMG 

The story of Iranian economic sanctions is one of US President Trump’s determination to economically (and even politically) upset the nation of Iran. On August 6,2018, he signed an executive order re-imposing sanctions on Iran to be effective on 4 November. The sanctions had been suspended in 2015 following the signing of the Iranian nuclear deal.

Among economic activities that will be most impacted by the US re-imposed sanctions are oil exports from Iran and all related oil supply chain activities like shipping, insurance, financing and banking.

However, what will multiply the scope of the sanctions is the threat by US of secondary sanctions against those countries and companies which have direct or indirect US business interests, should they attempt to trade with Iran.

At risk is about two million barrels per day (bpd) of Iranian oil exports which may be forced out of the market by the sanctions. The sanctions are happening at a time when oil production in Venezuela and Libya is much reduced, and also when Organisation of the Petroleum Exporting Countries(Opec)‘s influence on oil production control has been diminished by the irreconcilable positions of two key members, Saudi Arabia and Iran.

To the Middle East geopolitical watchers it is apparent that the re-imposition of Iranian sanctions has its genesis from a scheme by Israel /US/Saudi Arabia to reduce Iran’s political dominance in the Middle East region. Israel, which appears to be the real push behind this plan, has its unique long standing quarrels with Iran. The Saudis on their part want to settle a regional battle of influence and dominance with the Iranian Shiite regime. The USA, a staunch ally of both Israel and Saudi Arabia, is seemingly the implementing agent of the plan, doing the bidding for Israel and Saudi Arabia.

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Russia is the neutral Middle East player, diplomatically at ease with Saudi Arabia, Iran, and Israel and possibly with the US. China is in full support of Iran and will do all it can to redress Iranian pain. Yes, the Middle East is without doubt where key global interests converge, mostly on account of energy interests and huge investment opportunities.

President Trump is quite aware that the timing of the sanctions may politically injure him at home if oil supply disruptions prompt runaway oil price hikes at a time when US is going into mid-term elections.

Although Saudi Arabia has promised to step up production to make up any shortfalls, it is technically not possible to sufficiently increase production within a short time. However, the recent diplomatic confusion on Jamal Khashoggi’s disappearance may dissuade Saudis from increasing production.

Should the oil markets run amok, Trump may blink and walk back on sanctions by giving waivers to key US allies and traditional importers of Iranian oil (Japan, India, and South Korea) to resume limited imports from Iran to forestall a global supply and price crisis. He may even authorise a drawdown from US strategic oil stocks, albeit this will only offer a short-term relief.

What now looks inevitable from next month is a strong likelihood of oil prices climbing through $80s and in a worst case scenario going into $90s. Although Kenya does not import its oil requirements “directly” from Iran, it could be sourcing from refineries traditionally fed with Iranian oil. Kenya could also be using oil shipping and financing systems impacted by Iranian sanctions. All these supply chain risks can potentially increase supply costs to consumers through the open tender systems.

Any further oil price increases would be coming in the wake of the recent 8 per cent VAT hike and would put increased pressure on Kenya’s macroeconomics. The only group that will be smiling are the upstream Turkana oil basin investors, because any increase in global prices enhances their oil production economics, and quickens final investment decisions.

The first time that the US imposed economic sanctions on Iran was in 1979/80 following the ouster of the Shah of Iran by the Ayatollah Khomeini.

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