Iran’s economy crumbling as oil buyers jump ship
Iran’s main revenue source continued to be squeezed as Tehran’s most loyal oil customers have heeded the Trump administration’s bidding and stopped buying Iranian oil.
As a sign of how tightened US sanctions on Tehran are taking a toll on the Iranian economy, Iranian Vice-President Eshaq Jahangiri announced the government was withdrawing $1 billion from the National Development Fund of Iran, which is dedicated to future generations, ostensibly to create employment.
Washington’s reversal on granting oil sanctions waivers that took effect in early May led Iran’s crude exports to tumble as much as 50% to 500,000 barrels per day (bpd) from April levels even as Tehran produced crude and filled storage domestically and in Asia.
Three countries that initially stood by Iran after the Trump administration failed to extend waivers seemingly abandoned Tehran by not purchasing Iranian oil in May. China, India and Turkey had suggested they were considering flouting the sanctions but it appears the economic and political wrath they likely would experience from Washington was not worth the risk.
New Delhi had said it was holding off on deciding about abiding by the US sanctions until after its general elections, which saw Indian Prime Minister Narendra Modi win re-election in a landslide.
At a news conference May 23, Indian Ambassador to the United States Harsh Vardhan Shringla said India stopped importing Iranian oil after its waiver from the Trump administration expired in early May.
Shringla said: “We do understand this is a priority for the US administration, although it comes at a cost to us because we really need to find alternative sources of energy.”
Through its exemption, New Delhi had been importing around 260,000 bpd of Iranian oil — half of its typical pre-sanctions volumes from Iran. To win over New Delhi, the United States had pressed Saudi Arabia and the United Arab Emirates to replace the Iranian volumes dedicated to India.
Saudi Aramco offered its Indian customers additional oil sales to replace Iranian oil for deliveries beginning in June. However, that Saudi oil will come at a higher cost for the Indian refiners because Saudi Aramco did not offer discounts for its oil, which is higher priced compared to Iranian crude.
During Turkish Deputy Minister of Foreign Affairs Yavuz Selim Kiran’s May 22 visit to Washington, a Turkish official indicated that Ankara had ceased buying Iranian crude at the beginning of May. The unidentified official was quoted as saying that “as a strategic ally” of the United States, “we respect” the sanctions even though Turkey disagrees with them. Ankara was expected to increase crude deliveries from Iraq and Russia to make up for the missing Iranian oil.
Perhaps most surprising is China’s reluctance to breach the American oil sanctions on Iran. Beijing was the most outspoken about the reinstatement of sanctions and the waivers cancellation and seemed politically and economically willing to withstand any repercussions that would result from continuing to buy oil from Iran.
However, China may be treading lightly because it is engaged in a drawn-out and contentious trade spat with Washington. Significantly, China’s top two state oil refiners, Sinopec and China National Petroleum Corporation, opted out of purchasing Iranian oil for loading in May.
China has been increasingly favouring Saudi crude, with Chinese imports of Saudi oil rising 43% on the year in April to 1.53 million bpd, making Riyadh Beijing’s top supplier. Because Iranian crude accounts for around 6% of China’s total oil imports, Beijing will have no problem filling in lost Iranian barrels with increased volumes from Saudi Arabia and other suppliers.
Even with greatly diminished exports, Iran continues to pump oil because its energy infrastructure is ageing and fragile and it would be costly and potentially technically damaging to shutter production and then restart it.
For that reason, Tehran is filling domestic storage facilities and storage tanks in China. In addition, more than a dozen Iranian tankers are reportedly being used as floating storage, holding some 20 million barrels.
The reopening of an Iraq-Syria border crossing in an area under the control of Iran-affiliated militias could provide an oil smuggling route for Tehran. The Al-Qaim border crossing connects Syria’s Deir ez-Zor province to Iraq’s Anbar province and is being readied for opening.
Iran also reportedly delivered 1 million barrels of crude into the Syrian port of Baniyas in early May, resuming illicit Iranian crude deliveries to Syria by sea that had ceased at the end of 2018.