The US needs to actually enforce – not increase – sanctions on Iranian oil: Javier Blas
In a bold evasion of US sanctions, China cleverly disguises Iranian oil imports as Malaysian, defying international restrictions. Despite US lawmakers' efforts to enact new legislation, the truth remains: Iranian oil production skyrockets, bolstering Tehran's coffers and geopolitical influence. As tensions escalate in the Middle East, questions arise about the efficacy of current policies. Will the US enforce existing sanctions or continue turning a blind eye? The future of Iranian oil exports hangs in the balance.
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By Javier Blas
If you believe the Chinese government, the country doesn't import any oil from Iran. Zero. Not a barrel. Instead, it imports lots of Malaysian crude. So much that, according to official Chinese customs data, it somehow buys more than twice as much Malaysian oil as Malaysia actually produces.
Impossible? Well, of course. The reality is that China simply rebrands every barrel of Iranian crude it imports as Malaysian — the easiest and cheapest way to defy US sanctions, according to oil traders. It isn't a small matter: "Malaysia" was China's fourth-biggest foreign oil suppler last year, behind Saudi Arabia, Russia and Iraq.
US lawmakers, frustrated with the White House's passivity, are trying to force President Joe Biden into action. On Saturday, the US House of Representatives passed the Stop Harboring Iranian Petroleum Act, known as SHIP. The Senate is expected to approve the same legislation shortly, with a first vote on Tuesday. Because it's tied to long-delayed aid packages for Ukraine and Israel, the White House has said it won't veto the bill.
The truth is, the US doesn't need new sanctions on Iranian oil — it needs to enforce the ones it already has. For the last several years, either the White House has turned a blind eye to surging Chinese purchases of Iranian oil, with Biden seeming to be more concerned about rising oil prices than increased Iranian oil output, or the web of Chinese and Iranian obfuscation has outwitted US officials. I'm not sure which would be worse, but the result is the same: Iranian oil production last month surged to a six-year high of 3.3 million barrels a day, up 75% from the low point of 1.9 million barrels during the "maximum pressure" sanctions applied by former US President Donald Trump in late 2020.
At current prices, even after the discounts that Iran is obliged to offer, those additional barrels sell for more than $100 million a day — or about $3 billion a month. The windfall could not have arrived at a better time for Tehran, which desperately needs cash after months of street protests in 2022 and 2023, and to support its proxies in Syria, Iraq, Yemen, Lebanon and the Palestinian territories.
As much as the current system has loopholes, the new legislation has many, too. First, it won't start applying for 180 days after Biden signs it into law. If it's rubber-stamped by the the beginning of next month, the earliest the first sanctions can apply is a week before the US presidential election. Second, it calls for sanctions for those ports and refiners who "knowingly" deal in Iranian oil. But it allows anyone to claim innocence if they can produce paperwork that says the barrels originated somewhere else:
"… a foreign person shall not be determined to know that petroleum or petroleum products originated from Iran if such person relied on a certificate of origin or other documentation confirming that the origin of the petroleum or petroleum products was a country other than Iran, unless such person knew or had reason to know that such documentation was falsified …"
As Timm Schneider, an independent oil analyst, points out, Iran has gotten quite good at ship-to-ship transfers, using variously flagged vessels, "which could make it easier for parties to argue they did not 'knowingly' buy Iranian crudes."
Last year, Iran was the second-largest source of incremental oil production worldwide, behind only the US shale industry. So far in 2024, oil production keeps creeping up, with another peak expected this month just as Israel and Iran are firing missiles at each other. The new US legislation is unlikely to alter that picture for Iranian crude. But the SHIP legislation could have an impact in 2025.
The act would require the US government to publish an unclassified report within six months detailing the true nature of Iranian oil exports, how Iran labels its crude and how it smuggles it. The report, to be produced by the US Energy Information Administration, is likely to confirm what everyone in the industry already knows: Iran output is surging, and most of its oil ends up in China. But a research report by an industry consultant or even an opinion column by a journalist is one thing; if the EIA reaches the same conclusion, whoever is installed in the White House in 2025 will have to respond.
The act would also require the US State Department to deliver a "strategy to counter the role of" China in the "evasion" of US sanctions, with a focus on the number of vessels involved in oil smuggling between Iran and China and any "interference" from Beijing preventing the US from enforcing the embargo.
The legislation is a step in the right direction. But it comes too late, with too many caveats, and leaves way too much discretion to the White House. Until the November elections, Tehran still has a green light to export as much oil as it can. After that, we shall see.
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