LONDON (Reuters Breakingviews) - Donald Trump just unloaded multiple bullets targeted at America’s foot. The U.S. president said on May 8 he was rescinding support for the so-called Joint Comprehensive Plan of Action and re-imposing tough sanctions on Iran lifted as part of the 2015 deal with France, Germany, Britain, China and Russia. It’s a heavy and self-defeating price to pay for sticking to an election pledge.
The premise of the Iran deal – medium-term restrictions on Iran’s capabilities to develop nuclear weaponry in return for the easing of punitive economic sanctions – was generally sound. Lifting so-called secondary sanctions, whereby the U.S. effectively proscribed third parties transacting with Tehran as well as itself, have helped Iranian oil exports to more than double from around 1 million barrels per day and enabled GDP to rise 4 percent in 2017, compared to a contraction in 2015. Detractors claimed it still allowed Iran more leeway to finance unrest in Yemen, Syria and Lebanon.
It’s not clear yet quite how much of Trump’s rhetoric will be translated into policy. But after the implementation of similarly tough sanctions in 2011, oil production dropped by a third, dragging down foreign investment and GDP too. A severe scenario in which Trump’s tactics forced the EU, China and Russia to stop trading with Tehran could turn GDP growth in 2018 of 4 percent into a 1.2 percent contraction, Oxford Economics estimates – and cost 500,000 Iranian jobs. Moderate president Hassan Rouhani could lose influence to hardliners seeking a tougher nuclear policy.
The European and Asian states that import most Iranian crude could act as a buffer, if they defy Trump and keep buying. Yet Germany, Britain and France, whose Total oil group had already come back to Iran after 2015, would still be peeved with their American allies. Their companies won’t know whether to continue to invest in a country with 80 million people or hold back for fear of getting sanctioned themselves.
Finally, it throws another spanner into the works of a global oil market in which steady demand and reduced spare capacity had already left prices at $75 a barrel. Iranian disruption could push the price higher, though with U.S. oil producers pumping strong, it may not have as much influence as in the past. Saudi Arabia, as a major producer wants pricier oil – but Trump has implied he wants the opposite, and consumers of the fuel around the world will be inclined to agree. For one day’s work, it’s an impressively large mess.
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