US has options to tighten, expand Iran oil sanctions, but path forward is unclear

In the wake of Iran's April 13 attack on Israel, experts are divided on whether the US will tighten oil-related sanctions on Tehran, with some expecting swift action to expand sanctions and others expecting lax enforcement of existing sanctions.

"I expect the [US Department of Treasury] to quickly ramp up and expand sanctions on Iran's oil trade both as a direct response to Iran's drone and missile attack on Israel, and as a means to forestall a more escalatory response by Israel," said David Goldwyn, chairman of the Atlantic Council Global Energy Center's Energy Advisory Group.

The US may crack down on participation of US and European insurance clubs in the Iran-China oil trade, Goldwyn said. "China has been a free rider on US diplomatic efforts to contain tensions in the Middle East and has benefited from flouting US sanctions on Iran, Russia and Venezuela," he said.

So far, the US is not showing its hand on sanctions. The US is working with G7 leaders on new multilateral sanctions to target Iran's missile and other nefarious programs, said John Kirby, National Security Council spokesperson.

In response to a question about oil sanctions specifically, Kirby said, "I won't get ahead of economic pressure tools that we might be applying in the future. We're working our way through that."

Market impact

But like the Russia price cap policy, new measures against Iran will likely reduce Iran's income more than it will reduce oil flows, Goldwyn said. "The impact on prices should therefore be marginal," he said.

There could be some additional sanctions enforcement with a focus on targets linked to the Islamic Revolutionary Guard Corps and regional proxies, said Rachel Ziemba, senior advisor at political risk consultancy Horizon Engage. "But I don't think it will be material to the oil markets," she said.

There may be modest tightening of fundamentals and perhaps price as actors absorb new measures, but market actors are likely to be skeptical of enforcement potential, Ziemba said.

Congressional action

Congress is scheduled to vote on several Iran-related bills this week, including a measure that would prevent US banks from opening accounts for Chinese financial institutions involved in the purchase of Iranian petroleum or petroleum products.

"While I do not expect Congress will pass new laws mandating additional sanctions, many of the ideas being proposed, including punishing Chinese correspondent banks, may be included in Treasury's response," Goldwyn said.

Lawmakers may be using the votes to pressure the Biden administration to enforce oil sanctions more aggressively, Rapidan Energy Group said in an April 15 note. "However, these bills largely restate existing authorities and, as such, are mostly political messaging to signal support for Israel," Rapidan said.

The avoid US sanctions, China already channels all Iran transactions through banks that are not exposed to the US financial system, it said.

Sanctions enforcement

The US will likely maintain its soft enforcement of Iran oil sanctions, in part to avoid an oil price spike, said Brenda Shaffer, an energy expert at the US Naval Postgraduate School.

"Regardless of potential new declarations, the Biden administration will not enforce sanctions in a serious manner in an election year, when there are formally sanctions on Iran, Russia and Venezuela, and the Strategic Petroleum Reserve is low," Shaffer said.

Washington has even asked Ukraine not to attack Russian energy supplies, despite its effectiveness in battle, due to fears of a rise in the global oil price, Shaffer said. "The administration has not even taken serious steps to neutralize Iran's proxy—the Houthis—disruption of global shipping," she said.

The Iran-Israel direct confrontation is not over, warned Shaffer: "When the right Iranian target will present itself, Israel will act."