Editor’s Note: David A. Andelman, executive director of The RedLines Project, is a contributor to CNN where his columns won the Deadline Club Award for Best Opinion Writing. Author of “A Shattered Peace: Versailles 1919 and the Price We Pay Today,” and translator of “An Impossible Dream: Reagan, Gorbachev, and a World Without the Bomb,” he was formerly a foreign correspondent for The New York Times and CBS News. Follow him on Twitter @DavidAndelman. The views expressed in this commentary are his own. View more opinion on CNN.
The biggest winner from Donald Trump’s clampdown on Iranian oil exports is Vladimir Putin and Russia. That much became clear even before Secretary State Mike Pompeo made the official announcement early Monday. Crude oil prices, already up 44% this year, jumped nearly 3% more.
On Monday, Pompeo announced that the United States would end sanctions waivers for countries that import Iranian oil. “Our goal has been to get countries to cease importing Iranian oil entirely,” Pompeo said. “Last November, we granted exemptions from our sanctions to seven countries and to Taiwan. We did this to give our allies and partners [a chance] to wean themselves off of Iranian oil, and to assure a well-supplied oil market. Today I am announcing that we will no longer grant any exemptions. We’re going to zero.”
It was all part of Trump’s efforts to put the squeeze on Iran, halting its ability to fund terrorist operations and consistent with his move to torpedo Barack Obama’s deal to end Iran’s development of nuclear weapons. So now, unilaterally, the Trump administration declared that the US would no longer allow China, Japan, South Korea and five other countries to buy any oil from Iran.
Within minutes after the move became known, oil prices began to spike—a boon for Russia, one of the world’s largest oil suppliers. But not so good for a whole lot of other countries—including American motorists who’ll be paying a lot more for gasoline this summer. China, a nation whose leaders Trump is courting hard for his much-needed trade pact, did not react well to his oil edict.
With oil exports comprising some 60% of Russia’s total merchandise exports and 30% of its GDP, every dollar increase in the price of oil translates immediately into a dramatic improvement in Russia’s financial position. This cannot help but offset some of the impact of the sanctions that the United States and Western Europe continue to level on Russia as a result of the Kremlin’s seizure of Crimea and its ongoing activities in Eastern Ukraine.
In hard dollar terms, the impact is even more apparent. With Russia producing some 11 million barrels of oil a day, each dollar increase in the price per barrel of crude oil adds at least $4 billion to the Russian economy each year . Moreover, Russia ran a budget surplus last year that was close to 3% of its GDP, higher than forecast, as Russia’s Economy Minister Maxim Oreshkin told the Financial Times in December. It was the first such annual budget surplus since 2011.
As it happens, oil prices are one of the few economic indicators that are effectively a zero-sum game. While the oil price increases already anticipated by today’s American action may boost Russia’s economy, they also add substantially to the burden on America’s allies in Western Europe, who consume some 13 million barrels of oil per day.
Moreover, there are other real threats to the Europe’s oil supplies, particularly from the ongoing unrest in Libya, just across the Mediterranean, which had been pumping some 1.2 million barrels a day before the latest unrest, much of it destined for Europe. There are fears that unrest could lead to cutbacks of as much as half that output, further raising oil prices—and again providing another healthy boost to the Russian economy.
At least Russia and China, a leading victim of Monday’s Trump embargo action, have been preparing for this day for years. In January 2018, the second Russia-China oil pipeline came online, boosting Russia’s capacity to satisfy rapidly expanding Chinese oil requirements—and more cheaply than with a long sea voyage in expensive super-tankers from Iran to the nearest Chinese oil port.
But beyond all these short-term effects of Monday’s decision to screw down the hold on Iran even tighter are other black swan impacts that can still be seen on the horizon. These include the ability of large multi-national companies, especially in the oil patch, to forecast accurately the supply-demand-price equations that figure deeply into their decisions to invest or their pricing of products that require large amounts of petroleum. Not to mention any sudden increase in gas prices at the pump as Americans head out for their summer holidays.
Finally, of course, there are any number of geopolitical implications of the United States again dictating the trajectory of the world oil market and the broader economics that are so deeply dependent on this path.
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All these are issues that the President should have considered before embarking on this course and that may be far more difficult to undo than to implement.