U.S. Walks Tightrope Over Sanctioning Oil

"The Biden administration wants to keep gas prices stable ahead of the election by encouraging oil to flow into global markets. The effort has run square into another priority: being tough on adversaries Russia, Iran and Venezuela.

The policy has led to softer-than-expected sanctions on major oil producers, according to diplomats, former government officials, and energy-industry players briefed by current officials.

A case in point arrived on Tuesday, when the U.S. levied fresh sanctions against Iran. The measures affect a fraction of the country's oil exports and are unlikely to gum up global markets, analysts said.

Administration officials said the moves are finely balanced to keep prices low, but throw sand in the gears of Russia and Iran's oil export machines, meaning they earn less from each barrel of oil they sell.

"The president has wanted to do everything that he could to make sure that American consumers have the lowest price possible at the pump, as it affects families' daily lives," a senior administration official said.

Though tensions between Iran and the U.S. have ratcheted up since the Oct. 7 attacks on Israel by Tehran-backed Hamas, daily exports from Iran surpassed 1.5 million barrels a day this year starting in February, substantially more than at the start of the Biden presidency. Most of that oil is bought by small Chinese refineries at discounted prices.

The U.S. and its allies have been "very, very careful not to go too far and damage the ability of Western economies to function," when it comes to sanctions, said John Smith, partner at Morrison Foerster and former head of the U.S. Treasury Department's Office of Foreign Assets Control.

U.S. diplomats and energy officials have for decades worked around the globe to keep oil flowing, often involving uncomfortable alliances and accommodations.

When the Treasury department hit Moscow with a wave of sanctions on June 12 over the Ukraine conflict, it targeted banks, but left the country's oil industry largely untouched.

There is frustration among some staffers in the U.S. Treasury Department over the lack of action against oil-trading networks that ferry Russian and Iranian oil, including one that officials are currently investigating, according to U.S. diplomats and some of the energy-industry players briefed by current officials.

The network is operated by a little-known trader from Azerbaijan who emerged as the premier middleman for Russia's Rosneft Oil, The Wall Street Journal reported.

Supporters of the policy within the Biden administration said the moves are finely balanced.

"Our two goals, which are lowering costs for the American people and lowering profits for the Kremlin, are very much aligned with each other," a Treasury official said.

When Treasury imposed sanctions on Russia's state tanker owner, Sovcomflot, it also issued licenses exempting all but 14 of the company's fleet, which data provider Kpler estimates totals 91 ships. Industry players said the exemption licenses were a green light to oil traders to do business with those ships, minimizing the risk that they would be targeted by future sanctions.

The National Economic Council, led by Lael Brainard, and others within the administration worried that broader measures would lead to logistical problems in the oil market and boost inflation, people familiar with the matter said. Rising oil output from sanctioned countries is one reason crude prices have fallen from their highs earlier this year, analysts said.

In another example of the collision of foreign and energy policies, earlier this year, Washington asked Ukraine to stop attacking some Russian refineries with drones after the damage rattled markets.

The average price of a gallon of gasoline was $3.44 earlier this week, around the same level as a year ago, but substantially higher than four years ago, according to the U.S. Energy Administration.

The Iranian sanctions announced Tuesday target companies in the United Arab Emirates and Hong Kong that facilitate payments for Iranian crude. They aren't expected to have a tangible impact on oil markets, said Homayoun Falakshahi, an oil analyst at Kpler.

"It will be limited and temporary," he said."It's a question of forming new shell companies and rearranging the supply chain."

In the case of Venezuela, the U.S. rolled back sanctions last year on the condition of fair democratic elections. Tapping the country's reserves was suddenly a possibility again for Western oil producers. The country's crude exports have risen 5% so far this year, according to Kpler data.

The U.S. later didn't renew a general license for companies to operate in Venezuela after the country's highest court in January upheld a ban on the candidacy of an opposition leader.

Yet in recent weeks, officials have approached large commodity traders to apply for special licenses to ship Venezuelan oil and approved individual applications, according to administration officials and executives at major commodity trading houses.

"Nothing terrifies an American president more than a gasoline pump price spike," said Bob McNally, president of consulting firm Rapidan Energy Group and former White House policy official under George W. Bush. "They will go to great lengths to prevent this, especially in an election year."" [1]

If you live in a glass house of the global common market, then don't start throwing stones. Biden understands this. Germany's Scholz and France's Macron - no, they dived headlong into all kinds of sanctions that were harmful to them. Now they are failing to hold on to power. Poor things. Mother Merkel should have been asked how a large country is governed properly.

 

1. U.S. Walks Tightrope Over Sanctioning Oil. Hirtenstein, Anna; Wallace, Joe; Talley, Ian; Paris,Costas.  Wall Street Journal, Eastern edition; New York, N.Y.. 26 June 2024: A.1.