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COLUMN-US should analyse economic impact of tightening sanctions


COLUMN-US should analyse economic impact of tightening sanctions
If the White House toughens sanctions on Iran and Venezuela significantly (and the next decision on Iran sanctions is scheduled for the first week of May) any decision is likely to be tied to production increases by Saudi Arabia. Image Credit: Pixabay

The White House will have to weigh costs and benefits carefully before tightening sanctions on Iran and Venezuela further – and decide whether the economic price is worth the diplomatic gains. If the White House toughens sanctions on Iran and Venezuela significantly (and the next decision on Iran sanctions is scheduled for the first week of May) any decision is likely to be tied to production increases by Saudi Arabia.

The White House is likely to agree to scale back Iran sanctions waivers if, and only if, Saudi Arabia commits to replacing the lost barrels at least one-for-one to leave the global production-consumption balance unchanged. High-level discussions between the two countries over sanctions and production policy are likely to have begun already.

President Donald Trump spoke with Saudi Arabia's Crown Prince Mohammed bin Salman by telephone earlier this month about maintaining pressure on Iran and human rights, according to a statement from the White House. The content of the discussions was not made public but it is safe to assume that oil prices, production and sanctions formed part of the discussion since they are central to the bilateral relationship as well as policy towards Iran.

If sanctions are tightened, it will be because the White House believes it has an undertaking from Saudi Arabia to increase production by at least the equivalent amount, if not more, to contain the impact on U.S. motorists.

COSTS AND BENEFITS

The United States consumed 3.4 billion barrels of gasoline and 1.5 billion barrels of distillate fuel oil in 2018, according to the U.S. Energy Information Administration ("Petroleum Supply Monthly", EIA, March 2019). For every $1 benchmark oil price rise because of sanctions, the first round costs for households and businesses amount to roughly $5 billion per year (assuming increased crude prices are passed on by refiners).

Brent prices have already risen by $22 per barrel since the start of the year, as a result of output cuts by the OPEC+ group of oil exporting countries as well as sanctions policies and other supply disruptions. The impact has been similar to a tax increase of $110 billion per year on U.S. households and businesses and will rise to $150 billion if prices continue heading upward towards $80 per barrel.

Net costs to the United States are much smaller because the country has also become a substantial producer of crude and condensates as a result of the shale revolution. Domestic crude production is running at 4.3 billion barrels per year, so price rises have so far boosted domestic producers' revenues by around $95 billion per annum.

(Further refinements are possible to include the domestic costs of other petroleum products, such as asphalt, and benefits from the sale of other liquids, such as natural gas liquids, but the overall picture does not change much.)

POLITICAL CALCULATION

The problem for the White House is that the households and businesses hurt by cost increases for gasoline and diesel fuel are not the same households and businesses that benefit from higher crude prices. Oil price increases hit motorists, manufacturers, farmers and transportation companies across the country, while the gains are more concentrated in oil-producing states and communities.

Price changes, therefore, have distributional effects and political consequences within the United States. Most net oil-producing communities and states backed the president strongly in the 2016 election and are expected to do so again in 2020.

By contrast, net-consuming communities include swing states that provided the president's electoral college majority in 2016 and that he will need again to secure re-election next year. In general, higher gasoline and diesel costs fall most heavily on swing voters, which is why the president has focused on the need to keep prices down rather than the benefits from price increases.

And the United States and global economies have slowed significantly since the first half of 2018 which will make another round of price increases more painful for U.S. consumers and businesses. The president has already warned OPEC, via messages published on Twitter, that global economic and financial markets are "fragile" and "cannot take a price hike".

The political and economic cost-benefit calculation explains why the president has been pressing Saudi Arabia hard to increase its production to offset any further loss of barrels from Iran and Venezuela. If sanctions are tightened, it will indicate the administration has secured the necessary deal on production from Saudi Arabia, even if the commitments remain private.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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