The U.S. decision to abandon the nuclear deal with Iran is bad news for crude oil importers, good news for exporters, and complicated news for those with more entwined relations with Tehran. It injects another element of uncertainty into a market already puzzling over Venezuela, OPEC, trade wars, and interest rates.

On August 7, the first set of U.S. sanctions returned, intended to block Iran’s access to dollars and precious metals. The oil-related sanctions come back into force on November 4, but many of Iran’s customers have already begun to cut purchases.

In June, a State Department official escalated the goal of driving Iran’s crude exports to zero by November 4, with a “predisposition” not to give waivers to any country, except perhaps in very special circumstances. Earlier statements had suggested waivers would be given for countries making significant reductions in purchases, as they were with sanctions during the administration of former President Barack Obama.

Yet internal administration assessments reported by Bloomberg suggest Iran’s average exports of 2.1 million barrels per day (mb/d) of crude over the past year would not be cut completely but reduced only by 0.7-1 mb/d. The country sells another 0.3 mb/d of condensate (extra-light oil, a byproduct of natural gas production) not targeted by Obama-era sanctions but under interdict this time.

If this shortfall is bad news for the policy of “maximum pressure” on Tehran, it may not be such bad news for the administration of President Donald J. Trump. With key congressional elections on November 6, a self-inflicted spike in oil prices would be good news for petroleum-producing red states such as Texas, Oklahoma, North Dakota, and Alaska, but bad for American motorists.

For now, visible policies to contain the oil market fallout amount to some tweets threatening OPEC; engagement with Saudi Arabia and its OPEC allies on boosting their output; avoiding further sanctions on Venezuela that might collapse its oil industry entirely; and thoughts of tapping the United States’ emergency Strategic Petroleum Reserve, only a short-term fix. The United States’ much-vaunted “energy dominance” is for now held in check by a lack of pipelines out of the Permian Basin in western Texas, and the light nature of its crude, ill-suited to replace Iranian (and Venezuelan) medium- and heavy-gravity barrels.

Yet Iran’s oil exports have already begun to fall as buyers pre-emptively seek alternatives or run into practical difficulties with paying for and insuring shipments.

Crude Oil and Condensate Imports from Iran (in thousand barrels per day)

Source: Bloomberg “Iran Oil Sanctions Will Hurt More Than You Think”

On the importing side, the key players are the European Union, China, India, the United States’ East Asian allies (Japan, South Korea, and Taiwan), and Turkey. Since the coordinated OPEC-Russia action has already driven up oil prices strongly since September 2017, none of them are keen on yet higher fuel bills. In their different ways, as tariffs and higher interest rates loom, Europe, Turkey, India, and China have grander concerns about their vulnerability to U.S. financial and energy domination.

The EU has reintroduced its 1996 “blocking statute,” prohibiting compliance with extraterritorial U.S. sanctions. But neither the EU nor its individual governments import Iranian oil – companies do, overwhelmingly nonstate ones that cannot be directed to act against their commercial interests. Even companies interested in buying Iranian oil have to be able to finance and insure it, and banks were allergic to Iranian transactions even before the Trump administration reneged on the nuclear deal. The blocking statute may be a useful legal bargaining chip but will have to be backed up with much more hard power if the EU is to save its oil imports, and the deal.

China is the key to the maintenance of some Iranian exports. Its state-directed system allows it to insulate certain oil firms and banks. It runs a large trade surplus with Iran, allowing it to swap goods for oil to avoid currency transactions, and in April it launched in Shanghai its own crude oil contract, denominated in yuan, allowing futures trade and hedging for oil delivered in China in its own currency. For now, China has chosen to exclude U.S. crude from its retaliatory tariffs, but it needs to retain this option in an escalating trade war; this makes it yet more essential for China to be able to continue buying Iranian oil. China has reportedly told the State Department that while it will not cut imports from Iran, it will not increase them either, but this is likely to prove to be diplomatic evasion.

India, in contrast, has both majority state-owned and private oil firms, and runs a large bilateral deficit with Iran, limiting its use of barter deals. Politically, it has resisted the imposition of U.S. sanctions, but practical difficulties of shipping, insurance, and finance will significantly hamper its imports, requiring workarounds that the United States will then presumably attempt to block. India is hoping a 50 percent cut in imports would be enough to win a U.S. waiver for the remainder. But this would raise the question of which other U.S.-friendly governments would then feel reasonably entitled to similar waivers.

The U.S.-aligned East Asian countries, traditionally cautious and exposed on issues including China, North Korea, and trade, have little flexibility in abiding with U.S. sanctions. Japanese companies have asked their government to request waivers, but the United States seems likely to take a hard line. South Korea’s and Taiwan’s imports from Iran had already fallen to zero by July; Japan’s are consequently also likely to by November.

Turkey, a key buyer of Iranian oil and natural gas both during the last sanctions episode and now, is at loggerheads with the United States on various issues including Syria, the detention of a number of U.S. citizens, and tariffs imposed on its aluminum and steel industries. While Turkey will try to defy sanctions, its evolving currency and financial crisis may constrain its freedom of action.

By contrast, Iran’s oil-exporting neighbors are set to benefit from sanctions, in the shape of higher prices and market share. At June’s OPEC meeting, Iran was outmaneuvered, forced to concede a general increase in production to avoid an outright collapse of the cap on output. Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq upped production collectively by 0.65 mb/d between May and July. In principle, they have enough spare capacity to replace Iranian exporters entirely, though this would leave a very thin safety margin for any other unexpected events.

The odd one out is the UAE emirate of Dubai, which imports Iranian condensate (light oil) for the Jebel Ali refinery. It cannot replace this with Qatari condensate due to the ongoing embargo on Doha, and has instead been looking further afield, to the United States, Algeria, and Equatorial Guinea, and perhaps Russia and Australia.

Russia’s position is ambiguous. As the world’s largest exporter of both oil and natural gas, it benefits from higher prices and the removal of a competitor. However, as a target itself, it does not want to see the power of U.S. sanctions enhanced, nor its key Middle East ally weakened too much. Despite talk of oil-for-goods deals – enabling Iran to avoid sanctions by swapping crude for Russian grain, machinery, or other wares – these are logistically impractical in large volumes.

Unless these sanctions lead into a revised deal allowing Trump to claim victory, perhaps mediated by Russian President Vladimir Putin, they are likely to be the entrée to a prolonged cat-and-mouse game. Iran’s economic survival will depend on its ability to find loopholes and evasive tactics to get its crude to willing buyers, as it did during the Obama era via barter deals, discounts, using its own tanker fleet, disguising cargo origins, and other tactics. Meanwhile, many trade, energy, economic, and geopolitical events could change the rules entirely.