In the wake of recent attacks on American troops in the Middle East, President Joe Biden vows to hold those responsible accountable. Amidst military options, an alternative response emerges: closing the petrodollar spigot. Despite US sanctions, Iran’s oil production has soared, generating over $10 billion in additional revenue last year. Theories abound on Washington’s role, but the White House’s inaction or complicity is apparent. To curb Iran’s windfall, imposing stringent sanctions and targeting the illicit dark fleet could be the solution, as the Islamic Republic eyes continued economic gains.
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By Javier Blas
President Joe Biden has promised to “hold all those responsible to account” after a series of weekend attacks against American troops in the Middle East, blaming Iranian-backed militias. The response, he said, would come “at a time and in a manner [of] our choosing.”
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Undoubtedly, the Pentagon will present the White House with military options. But there’s another manner in which to respond: Close the petrodollar spigot.
Over the last year or so, Iran has been able to boost its oil production to a five-year high of about 3.2 million barrels a day, earnings billions of dollars in the process. And that’s despite draconian US sanctions precisely targeting, at least on paper, Iran’s oil industry. The extra money is bankrolling the country and, by extension, its proxies in Syria, Iraq, Yemen and Lebanon.
How much extra money is rolling in from oil? We cannot be certain, but my back-of-the-envelope arithmetic suggests Iran pocketed the non-trivial sum of more than $10 billion last year thanks to its higher oil output.
According to the International Energy Agency, Iran produced, on average, 445,000 barrels a day more in 2023 than it did the year before. As such, Iran was the world’s second-largest source of oil production growth last year, only behind the US shale industry.
Brent crude, the global oil benchmark, averaged $82 a barrel last year. But Tehran is forced to sell its crude at a discount to buyers in countries like China. Conservatively, I assumed that Iran sold the crude at an enormous discount of $20 per barrel, resulting in an annual average price of $62 a barrel. That yields extra annual oil revenue just above $10 billion. But there’s even more: Last year, Iran sold about 80 million barrels of crude and other petroleum products that it held in storage onboard tankers. The sale probably yielded close to $5 billion extra.
How Iran has managed to boost its output despite American sanctions is contentious — but thinking can be summarized into three broad theories. One says that Washington turned a blind eye on sanctions enforcement, using the flux of petrodollars as a carrot to bring Iran to the negotiating table for a new nuclear deal. Since Biden is in office, Iranian production has increased nearly 50%. The extra Iranian oil also had the benefit of lowering gasoline prices ahead of US elections in 2023.
The second theory says that the Biden administration was forced to make a pact with the devil. Last year, the priority in Washington was to depress oil prices to hurt Russian President Vladimir Putin’s ability to wage war against Ukraine, and more Iranian production was the only way to get the job done. The third theory says that Iran got smarter, finding ways to bypass sanctions, and Washington has been unable to close the gap.
Either way, the White House seems complicit by action or incompetence. America has been subsidizing Iran’s fight against America.
In reality, all three theories have played a role. Certainly, Iran has exploited a growing black market for oil to bypass the sanctions. At the same time, however, we haven’t seen much of an effort in Washington to clamp down on those practices. In November, for example, the White House promised that it would push Iranian oil exports down. But nothing has happened since then to suggest that the Biden administration is seriously trying to clamp down. And of course, foreign policy is messy. Last year, Washington may have concluded that achieving its objective of harming Russia required it to accept helping Iran.
If I’m right, forcing production down should be possible — just unleash the force of American sanctions again, starting by sanctioning all the oil tankers in the so-called dark fleetthat are servicing the likes of Russia, Iran and Venezuela. Only a fraction of them, perhaps as little as one-quarter, have received such a designation.
With no action, the Islamic Republic is poised to make even more money. In its last monthly report, the IEA warned: “Iran could post a fourth straight year of annual growth in 2024 if it can sustain recent production rates.”
Targeting Iranian oil production has two problems, however. The first is that Tehran may use its proxies to disrupt oil shipping lanes, particularly the Strait of Hormuz, which links the Persian Gulf with the high seas. The second is that oil prices would rise due to lower global output, boosting inflation just as the global economy needs lower interest rates, and strengthening Russia by increasing its oil revenue. The latter risk, though, could be mitigated by encouraging allies in the Middle East, such as Saudi Arabia and the United Arab Emirates, to offset any drop.
On Monday, Iran tried to distance itself from the attacks over the weekend — knowing well that the White House would likely to retaliate. “Resistance groups in the region do not take orders from the Islamic Republic of Iran,” Foreign Ministry spokesman Nasser Kanaani said. Perhaps he’s telling the truth, but what’s unquestionable is such militias take Iranian money and weapons. As the old political saying goes, follow the money — in this case, that means the petrodollars.
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