The Biden administration has been loath to unleash the oil weapon to bring misbehaving countries to heel, leery of spiking oil prices in an election year. But U.S. President Joe Biden’s hand may be forced, with lawmakers in Congress pushing fresh sanctions against countries such as Iran that could remove a big chunk of oil from an already finely balanced market.
The Biden administration has been loath to unleash the oil weapon to bring misbehaving countries to heel, leery of spiking oil prices in an election year. But U.S. President Joe Biden’s hand may be forced, with lawmakers in Congress pushing fresh sanctions against countries such as Iran that could remove a big chunk of oil from an already finely balanced market.
The question is whether additional sanctions on major oil producers will lead to an oil price spike later this year, just in time to dampen Biden’s reelection bid—or whether the gusher of oil from the Americas will allow Washington to keep a lid on both global oil prices and global bad behavior.
The latest congressional push included a new sanctions bill targeting Iranian oil exports (and their Chinese buyers) as part of an omnibus that finally appropriated funds for defense assistance to Ukraine, Israel, and the Asia-Pacific. If passed, signed into law, and fully enforced—and the last is a big if—that could remove more than 700,000 barrels a day of Iranian oil from the market, almost half of Iran’s current exports.
But that’s not all. The sanctions bill came just days after the Biden administration, under bipartisan pressure from Congress, withdrew sanctions relief from Venezuela due to Caracas’s repeated broken pledges about allowing free elections. That could be an issue in the future for the heavy grades of oil beloved by U.S. Gulf Coast oil refiners. All the while, against Washington’s wishes, Kyiv keeps using long-range drones to target the soft underbelly of Russia’s oil industry, damaging its ability to export petroleum products.
Together, the new measures threaten to further tighten an oil market that doesn’t have much slack right now. Benchmark crude in London remains around $86 a barrel, as OPEC and its partners have said they will keep voluntarily curbing their oil output through June to prop up prices and as geopolitical tensions in the Middle East keep oil markets on edge.
“OPEC is withholding a huge amount of oil, and we had strong demand growth coming into this year,” said Rory Johnston, the founder of Commodity Context, an oil market research consultancy. “Whether or not that demand will grow this year, and U.S. shale oil will accelerate, those are the two things” that will determine the balance of oil markets, he said.
In terms of global oil supplies, while OPEC and its partners are still curbing output (except for Iraq and Iran), the United States, Canada, Brazil, and tiny Guyana are making up the difference.
The United States is back to producing more oil than any country ever, about 13.1 million barrels a day, but it is unlikely to see much further growth this year. Canada could add half a million barrels a day of new production this year, the last hurrah for its controversial oil sands. Guyana, the surprise player in the Americas, has already added about 250,000 barrels a day over what it produced last year. Together, all that would be enough to offset any belt-tightening from OPEC—unless global demand for oil is a lot higher than expected.
In the past, OPEC’s biggest producer, Saudi Arabia, could often be counted on to loosen the taps to keep oil prices in a reasonable range and could in theory be expected to do so if it meant taking a swipe at Iran in the bargain. The problem is that Saudi Arabia and OPEC’s goal posts have moved. They used to aim at keeping oil prices in the $60-$75 a barrel range. Now, though, “they have a much higher floor and a much higher ceiling,” said Johnston, who added that oil prices would have to be close to or over $100 a barrel to prompt an about-face from the global market’s swing supplier.
That’s why any oil lost to new sanctions could be a problem—for global supply and demand, for oil prices, and politically for the Biden administration.
But there are a couple of reasons to think the new legislation targeting Iranian oil exports, which are at their highest level since 2018, may not hamstring Biden too much.
First, said Ben Cahill, an energy expert at the Center for Strategic and International Studies, the sanctions wouldn’t even take effect until October. Second, they would require the United States to target a very tricky corner of the oil export market, namely independent Chinese refineries with little connection to U.S. financial institutions that are the usual cudgel in levying sanctions.
“It’s hard to stop that Iran oil trade. It involves small Chinese teapot refineries, which don’t touch the U.S. financial system at all,” Cahill said. “If you want to deal with the teapots, you have to engage with the Chinese government, and I don’t believe this is the biggest issue in the bilateral relationship.”
The reason the Biden administration has been wary of going after oil exports globally—whether in Iran, Venezuela, or Russia—is not hard to divine. In an otherwise booming U.S. economy, inflation is still sticky, and gasoline prices are the most visible prices of all. Biden’s economic advisor vowed last week to do whatever it takes to keep pump prices low through the summer, even hinting at a possible release of U.S. strategic oil reserves.
“Energy costs are a hyperfocus for this administration, and they have been since the beginning,” Cahill said. “So they are walking a tightrope” when it comes to strictly enforcing sanctions that could upend the global oil market.
If perhaps more for this Congress than this White House, oil sanctions remain a siren song for Washington. Over the last decade, thanks to the explosion of shale oil production, the United States became a big producer, then an oil exporter, and then the largest producer of them all. Throughout, it used its newfound heft to levy sanctions on countries such as Iran, Venezuela, and Russia, secure in the knowledge that gushing U.S. wells would make up for any shortfall from punished producers. If the United States has an energy weapon, lawmakers figure, why not use it?
“The fact that the U.S. has been such a source of production growth in the last decade has enabled it to impose more sanctions on more countries,” Cahill said. “And Washington has fallen in love with energy sanctions. It’s always the easy thing to do when you want to apply pressure, even though they are not always that effective.”
From the point of view of the Biden White House, just because it is the biggest player in the oil patch doesn’t mean it can ignore the global oil market dynamics that affect prices everywhere, even in small U.S. towns, just a few months away from a momentous election.
“Shale gives the United States free rein to impose sanctions on more countries, but it is not a free pass,” Cahill said.
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