U.S Sanctions on Iran

Crude Oil Price Trends

The president of the United States , Donald Trump, had pledged to be tough on Iran during his presidential campaign. Since the time he became the President, Trump has stayed true to his words by reinstating the sanctions on Iran in 2018, making it an unfortunate year for the country.

In May 2018, under the instructions of the President, the U.S. pulled out of the Joint Comprehensive Plan of Action which was signed with Iran and announced that the sanctions would return in two phases. The sanction related to the crude oil, which serves as Iran’s economic lifeline, was reintroduced towards the end of 2018. It is widely believed that the sanction could have been worse for business in Iran had the U.S. not granted waivers to eight significant importers like China, India and Japan, who account for the highest amount of Iranian crude oil.

As the U.S. and Iran remain embroiled in controversies, economists, politicians and analysts are awaiting the latest developments before making critical business decisions. The oil market in the recent history had proved to be somewhat conservative which was evident when the world markets factored in sharp declines in the oil production of Iran after Donald Trump had aggressively threatened sanctions on Iran. Post the threats, the markets were forced to recalculate once generous waivers were handed out to some of the biggest oil customers of Iran. Experts believe that the oil market has the potential of being extremely volatile throughout 2019 owing to the sanctions. Many even think that there is a strong possibility that some of the waivers that are applicable now, may not be available to Iran sometime in the future.

The sanctions have already proved to be harmful to the economy of Iran and their effect could be even more damaging in the future. A state of economic shock has engulfed the country as several foreign companies have withheld new investments or hinting that they may be exiting soon. Numerous companies are also worried that their continued association with Iran may put them in a position where they may no longer have access to the U.S. market or they will be excluded from the dollar-based financial system.

The Iranian oil market had already witnessed a decline of over 1 million barrels per day between June to September. It fell from 2.7 million barrels per day in June to approximately 1.7 or 1.9 million barrels per day in September. In addition to this, there has been a marked increase in unemployment in the region coupled with the issue of rapid inflation. It is therefore understandable that the Iranian Rial has slumped in the recent months.

Different affected countries have looked to find measures and counter this problem. India adopted a unique strategy of using escrow accounts in banks of Iran for the payment of Iranian crude oil. Further, the payments were made in Indian Rupees, thereby avoiding punitive action from the U.S. In addition to this, it was ensured that the payment was spread across five banks to reduce the risk of adding sanctions by the U.S on any one of the banks.

Meanwhile, the European Union too has shown interest in continuing business with Iran and are considering creating a mechanism for the purpose. The Government will soon generate a new payment system so that it will continue the business relations with Iran without punitive measures from the U.S. This move has however been criticized by the U.S. and has been labeled as a counterproductive measure for global peace and security.

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