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A Close Game of Oil Gambling
Choi Ye Ho  |  yehosky@korea.ac.kr
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As North Korea continued to develop their own nuclear weapons, ignoring the United States’ (U.S.) request, the Trump administration imposed economic sanctions that banned North Korea from exporting coal. Such economic pressure has actually worked out fine, since Kim Jong-un, the supreme leader of North Korea, tried to sit at a table with the U.S. in order to negotiate the nuclear issue. The situation indicates the diplomatic power the U.S. wields over other nations. Along with the North Korea-U.S. issue, the U.S. has been imposing similar economic sanctions on Iran. The entire world seems to be paying attention to the next step of the U.S.

 

On July 14, 2015, six countries — the U.S., United Kingdom (UK), France, Germany, China and Russia — and Iran reached an agreement on Iran’s nuclear program in Vienna, Austria. Six countries agreed to lift various sanctions imposed on Iran in return for Iran’s decision to discard its nuclear program. However, on May 8, 2018, President Donald Trump signed an executive order to resume sanctions against Iran after officially declaring his withdrawal from the Joint Comprehensive Plan of Action (JCPOA). The problem is, due to the U.S. economic sanctions on Iran, South Korea has been banned from importing Iranian crude oil since May 3.

 

There have been two sets of sanctions on Iran by the U.S. regarding the nuclear issue. The first sanctions were imposed on August 7, 2018, and included products such as Iranian gold, jewelry, iron, aluminum, coal, cars and so on. Iranian crude oil is included in the second set of sanctions imposed on November 5, 2018. However, in the second sanctions, South Korea was excluded from the influence of the sanctions for 180 days along with other countries including China, India, Greece and Italy. The reason was to give these countries enough time to seek replacements for crude oil imports. On May 3, South Korea was re-included as a subject of the sanctions.

 

Trump Taking a Hard-line


Despite the concerns of other nations, the U.S. has decided not to extend the temporary exception of the economic sanctions on Iran. The U.S. Secretary of State, Mike Pompeo declared, “Today, we will announce that we will not be imposing significant reduction exceptions1 (SREs) for current Iranian oil importers,” at a press conference on April 22. He added that the ultimate objective of the current sanctions on Iran is to zeroise Iran oil exports. As the U.S. seemed to be pushing ahead its policy towards Iran, Iranian oil importers expressed further concern over rising international oil prices and lack of crude oil supply.

 

In response to this situation, the U.S. administration has been pressuring the Organization of Petroleum Exporting Countries (OPEC) to increase crude oil production. President Trump is criticizing the current situation in which the OPEC members, led by Saudi Arabia and other oil producers such as Russia, are continuing to implement the cut-off agreement of crude oil production to maintain international oil prices. The confrontation shows that the impact of Iranian economic sanctions on the global economy has reached its peak.

 

 

   
▲ Mike Pompeo

 

The World Expressing Concern

 

No matter how actively the U.S took a certain stance on this issue, not all countries supported it. China vehemently denounced U.S.’s Iranian sanctions, urging the nation not to commit any wrongful acts that encroach on China’s interests. China added that the U.S. sanctions on Iran are definitely going to intensify the turmoil in the international energy market. Turkey also lashed out at the U.S. decision. Turkish Foreign Minister, Mevlut Cavusoglu said that the United States’ decision to end SREs is not conducive to regional peace and will inflict severe pain on Iranians. China and Turkey seemed to have raised their voices because the two are considered the biggest victims of the move; China is the largest importer of Iranian oil in the world, while Turkey also imports an average of 97,000 barrels of Iranian oil a day.

 

South Korea is not an exception from the chaos. It is true that the actual proportion of imported Iranian crude oil in South Korea is not as big as that of China or Turkey. According to the National Statistical Office (NSO), about 60 million barrels of Iranian crude oil were imported by South Korean refiners last year, which is approximately five percent out of all South Korean oil imports. Nevertheless, the refiners have been anxious about sanctions against Iran because of Iranian condensate. “Naphtha from low-cost Iranian oil is advantageous for both domestic demand and exports,” said an official from the oil industry. Since there are not many countries that produce condensates, prices are expected to rise further.

Oil War—Where is it Headed?

 

It is expected that sanctions on Iran are unlikely to lead to a surge in oil prices. Since Iran’s oil supply in the world market is not big enough to control the international oil prices, they predicted that the rise in oil prices will not be prolonged. According to statistics from Bloomberg, Iran’s oil production constitutes nine percent within OPEC and three percent in the world oil market. However, the problem is that OPEC wants to boost international oil prices by extending oil production cuts. It seems that a sharp drop in oil prices last year after expanding oil production in preparation for a decrease in supply from Iran discouraged OPEC from increasing the total supply.


The South Korean government has prepared countermeasures to stabilize domestic oil prices in case of possible situations. The South Korean deputy prime minister for economic affairs and the minister of economy and finance, Hong Nam-ki said that the government will put top priority on stabilizing domestic oil prices in preparation for a possible short-term rise of international oil prices, by revitalizing Al-Ddeul2 gas stations and promoting competition in the oil market by expanding e-commerce.

 

Even if oil price hikes are not prolonged, U.S. sanctions on Iran are expected to continue somehow. It seems that the entire world, including South Korea, will have to continue to pay attention to the gigantic chain of crude oil connections throughout the world. Whether Iran stands back and gives up its nuclear program or the U.S. lifts the sanctions, that is the question.

 

   
▲ Key Buyers of Iranian Oil

1 Significant Reduction Exceptions (SREs): In November 2018, the U.S. granted exemptions from its sanctions for importing oil from Iran for a 180-day period for India and seven other countries including China, Japan, South Korea, Turkey, Italy, Greece and Taiwan (Provided by Vajiram& Ravi).

2 The Al-Ddeul gas station is a gas station project implemented by the South Korean government. The original aim was to improve the retail distribution of oil products, which is controlled by a monopoly of large oil refiners, to provide oil at a cheaper price.

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