By Simon Watkins of OilPrice.com
The ability of either the U.S. or China – or even both working together – to contain Iran’s response to the attacks on its military proxies may have disappeared with the latest U.S. attacks on them.
The U.S.’s toleration of increased oil flows from Iran to China also meant that Beijing was relatively content to use its huge influence in the Middle East to further keep political tensions down.
A stricter sanction regime on Iran and less Iranian oil for China may result in higher oil prices this year.
Until a few days ago, two key factors had kept oil prices down since the beginning of the Israel-Hamas War on 7 October 2023. The first was the exceptionally accomplished diplomacy of U.S. Secretary of State Antony Blinken and his team in preventing the direct involvement of more Middle Eastern states in the conflict. The second was that the White House has been choosing to disregard a dramatic rise in illegal oil exports from Iran to China since Russia invaded Ukraine on 24 February 2022. Irrespective of whether oil enters the global market legally or illegally it nonetheless satisfies a demand and helps to dampen down prices. In the case of this second factor, the U.S.’s toleration of increased oil flows from Iran to China also meant that Beijing was relatively content to use its huge influence in the Middle East to further keep political tensions down. However, the latest military strikes by Iranian proxy forces on U.S. targets that caused the death of three American service personnel, and the subsequent retaliation by Washington against several of Tehran’s military proxies, may mean that this second factor will be taken out of the oil price equation. And if that happens, oil prices could rocket.
According to one source who works closely with Iran’s Petroleum Ministry and another who works in the European’s Union’s energy security complex – both exclusively spoken to by OilPrice.com within the last month – as from 12 December 2023 to 18 January this year Iran was producing between 4.6-4.9 million barrels per day (bpd). This has subsequently dropped to an average of around 4.2-4.5 million bpd. This compares to official figures of 2.99 million bpd. Subtracting the oil used domestically and in the manufacture of other products, Iran has been exporting around 1.80-1.95 million bpd of crude during that period, and for several months before the figure was only slightly less.
Most of this additional oil goes to China through the various methods of sanctions avoidance analysed in full in my new book on the new global oil market order. Suffice it to say here, part of this involves just switching off a ship’s automatic identification systems (AIS) transponder, making the vessel more difficult to track. Another part involves simply lying about a ship’s final destination in the freight documentation and in the vessel’s voyage plan. This standard Iranian sanctions-avoidance measure was openly acknowledged in 2020 by its former Petroleum Minister, Bijan Zanganeh, when he said: “What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.” Additionally, transfers at sea in territorial waters of Malaysia and Indonesia have proven another popular way for Iran to move oil ultimately to China. As Iran’s then-Foreign Minister, Mohammad Zarif, stated in December 2018 at the Doha Forum: “If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions.”
From China’s side, the system of quietly buying sanctioned Iranian oil has worked flawlessly for years and continued to work in the same way now, as also analysed in depth in my new book on the new global oil market order. As also highlighted by me in an article for OilPrice.com back on 3 August 2020, multiple reports that Iran’s oil exports to China had fallen to zero overlooked the rather important fact that people with something massive to lose if they tell the truth frequently choose to lie instead. The reports also overlooked a key technical fact that any and all crude oil imports to China from Iran can be held in ‘bonded storage’. Put simply: crude oil that goes into ‘bonded storage’ is not put through China’s General Administration of Customs (GAC) at all – and is not even recorded as having been ‘paid for’ - and consequently does not appear on any GAC documentation. This meant – and still means - that China can import as much Iranian oil as it wants without the oil appearing in any import figures and without, as far as the letter of the law is concerned, China breaking any U.S. sanctions.
This long-time collusive misrepresentation of the size of Iranian oil flows to China has particularly suited both the U.S. and China – and the world, in fact – since Russia’s invasion of Ukraine. Vicious spikes in oil and gas prices in the immediate aftermath of the February 2022 invasion caused energy-price-fuelled inflation to spiral out of control. For the U.S.’s key allies that are net energy consumers in the West and East this threatened power shortages and major economic recessions if not dealt with quickly. It was at this point that the White House quietly resumed talks in earnest with Iran on a new iteration of the ‘nuclear deal’, as also analysed in depth in my new book on the new global oil market order. Part of those talks was a further easing up in U.S. focus on the issue of sanctioned Iranian oil exports. For China, this understanding with the U.S. on Iranian oil flows is extremely important for the prospects of its ongoing economic recovery from three years of Covid.
For one thing, China can still buy Iranian oil for at least a 30 percent discount to the Brent oil price benchmark through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and also analysed in full in my new book on the new global oil market order. Additionally, the economies of the West remain its key export bloc, with the U.S. still accounting for over 16 percent of China’s export revenues on its own. According to the senior E.U. energy security source spoken to exclusively by OilPrice.com recently, economic damage to China would dangerously increase if the Brent oil price remained over US$90-95 pb for more than one quarter of a year. Indeed, Beijing’s lack of appetite for an outright superpower showdown in the Middle East right now was signalled clearly by the recent visit to the U.S. of its President, Xi Jinping – his first in six years.
A similar range for the oil price is also what is wanted by the U.S. and has informally been in place since the presidency of Donald Trump, as also detailed in my new book. The floor of the range is US$40-45 pb of Brent, as it is seen as the price at which U.S. shale oil producers can survive and make decent profits. The ceiling of the range is regarded as US$75-80 pb of Brent for two reasons – one political and one economic, although they are linked. The political reason is that since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, if it was in recession in this timeframe, then only 1 sitting president has won out of 7 times (although even the 1 is debatable). The economic reason is based on longstanding estimates that every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and every 1 cent that the average price per gallon of gasoline rises removes more than US$1 billion per year in consumer spending. Historically, around 70 percent of the price of gasoline is derived from the global oil price.
However, the ability of either the U.S. or China – or even both working together – to contain Iran’s response to the attacks on its military proxies may have disappeared with the latest U.S. attacks on them. Similarly, the willingness of the U.S. to tolerate the ongoing sale of major flows of sanctioned oil from Iran may be over. If the dampening effect of these Iranian oil flows is removed from the oil market, then this would likely lead to an oil price rise to around US$102 per barrel, according to World Bank estimates of a ‘small disruption’ (0.5 million bpd - 2 million bpd loss of supply) in the oil market. If a major increase in risk in the Middle East as U.S. and Iran-backed attacks continue leads to a ‘large disruption’ (6 million bpd -8 million bpd) in oil supply then the World Bank forecasts a 56-75 percent increase in oil prices to between US$140 and US$157 a barrel.
