Pain at the Pump? Why Military Action or Sanctions Against Iran May Backfire on US & Allies

Market watchers warn that oil prices could surge if the latest tit-for-tat between Israel and Iran morphs into a wider regional conflict. If the Biden administration slaps new sanctions on Iran's oil exports, it could send prices higher too, observers say.

On the eve of Iran's retaliatory strike on Israel, oil prices spiked, but slightly backtracked in the aftermath of Tehran's attack. On Monday, Brent retreated 0.9%, while West Texas Intermediate (WTI) was down 0.8%.

"The impact of Iran’s attack on oil prices was hardly noticeable for the simple reason that the flow of oil from the Gulf region hasn’t been disrupted," Dr. Mamdouh G. Salameh, an international oil economist and a global energy expert, explained to Sputnik. "This could, however, change if Israel retaliates, thus prompting Iran to respond with a harsher retaliation that could lead to a disruption of oil shipments through the Strait of Hormuz," he noted.

Brent Crude is currently trading around $90 a barrel, yet Salameh predicts that we should be prepared for a potential rally in the near future. He estimates that Brent will fluctuate between $90 and $100 per barrel throughout the year. However, the expert forewarned that in the event of increased tensions between Israel and Iran, the price could surpass $100 and even reach $120 per barrel.

"Iran had no alternative but to retaliate against Israel’s attack on its Consulate in Damascus, Syria in which two high ranking commanders of the Islamic Revolutionary Guard Corps (IRGC) were killed otherwise it would have lost face in the world and would have been depicted as a paper tiger," said Salameh.

"Moreover, Iran warned Israel not to retaliate and that it will get a harsher response if it did. I am convinced that Israel is going to respond in one way or another, but not immediately. So we are now in some sort of calm before the storm. Israel is coming under heavy pressure from the United States and its allies not to respond," the expert continued.

The Biden administration does not want any ratcheting up of tensions between the two arch enemies that could potentially lead to a blockade of the Strait of Hormuz. This waterway is recognized as one of the world's most crucial oil passages, with tankers transporting roughly 17 million barrels of crude oil through it daily, accounting for about one-fifth of the world's total consumption. If the strait were to be blocked, it is likely that global petroleum prices would surge, resulting in increased pain for American consumers at the pump right before the 2024 presidential election.

"However, the Biden administration has signaled that it will impose additional sanctions against Iranian crude oil exports, particularly to China," Salameh noted. "To this effect, the US may also decide to impose restrictions on Chinese financial organizations and banks alleged to be involved in Chinese purchases of Iranian crude," the oil analyst explained.

Axios reported on Tuesday that Treasury Secretary Janet Yellen is preparing "fresh sanctions" for Iran. The media outlet noted that Yellen is likely to force Western finance ministers at the annual spring IMF meetings this week to coordinate on possible joint actions against Tehran.

American congressmen aren't sitting on their hands, either. According to Bloomberg, House lawmakers are pushing ahead with the Iran-China Energy Sanctions Act of 2023, which envisages tightening the screws on Iranian oil exports and China's purchase of crude or petroleum products from the Islamic Republic. US lawmakers are expressing outrage about the fact that Iran's oil exports have reached a four-year high of 1.5 million barrels per day this year. Around 80% of Iranian crude is sent to China’s independent refiners.

"The truth of the matter is that any additional sanctions on Iran won't fare better than the existing ones," Salameh said.

Restricting Iran's oil exports may boomerang on the Biden administration. With no immediate replacement for the Iranian oil that could be lost, especially since OPEC+ members have decided to keep cutting back on production and exports for the time being, there could be a significant impact on the market. Furthermore, China's bullish economy and high energy demand only serve to exacerbate this situation, as any decrease in oil supply will likely lead to a sudden surge in prices.

Experts warn that since China is one of the largest consumers of Iranian crude, they would have no choice but to fiercely compete for oil from other sources if Iran's exports were to be hampered. This could potentially lead to further instability in the global oil market.

"The China factor got a huge boost yesterday when it was announced that China’s economy grew by 5.3% in the first quarter of 2024 beating its own projection of 5.0%," Salameh said. "This very bullish factor will add to growing bullish sentiments about global oil demand which is, anyway, underpinned by solid fundamentals, robust demand and a tightening market."

Despite all the muscle-flexing, the Biden administration is unlikely to take significant action against Iran, believes Michael Rothman, president and founder of Cornerstone Analytics, a US-based consultancy focused on macro-energy research.

"This looked to me as having a near-zero probability given the Biden Administration has actually loosened US compliance measures with existing sanctions on Iran that, in fact, allowed the country’s oil exports to rise over the past year," Rothman told Sputnik.

Another potential issue that could arise from a rise in oil prices is the risk of inflation increasing. This, in turn, could hinder economic growth in the West and result in delays in rate cuts by Western central banks. In such a situation, any military or economic actions taken against Iran by Israel or NATO countries would be teeming with substantial risks.