On May 1, President Trump announced in a three-sentence Truth Social post that any country or person that buys Iranian oil or petrochemicals will immediately be “subject to . . . Secondary Sanctions” and “will not be allowed to do business with the United States of America in any way, shape, or form.” The declaration builds on the administration’s approach of applying “maximum pressure” on Iranian oil exports to force policy changes from Tehran.
The terse announcement leaves more questions than answers. The second part of the statement—a total cutoff from business with the United States—goes well beyond the typical application of secondary sanctions, which would represent a comparatively less disruptive scenario for global trade and the broader economy.
This analysis offers an interpretation of President Trump’s announcement and its implications for the economy and global oil flows.
Q1: How significant is the May 1 declaration for oil markets and international trade flows?
A1: If implemented as stated, the measures would severely disrupt global trade and slash economic activity, but that’s likely not what President Trump intended to convey. Instead, the announcement should be interpreted as Trump losing patience with the largely uninterrupted flow of oil from Iran to China, especially at this time when seeking maximum leverage against Beijing in the new bilateral trade war.
Shortly after his inauguration, Trump issued a National Security Presidential Memorandum (NSPM-2) outlining a campaign of so-called “maximum pressure” on Tehran with the express objective “to drive Iran’s export of oil to zero, including exports of Iranian crude to the People’s Republic of China.” According to Vortexa, about 80 percent of Iran’s oil exports, averaging close to 1.5 million barrels per day so far this year, have gone to China.
The administration has since taken nearly a dozen actions in support of the NSPM-2, including sanctioning a small Chinese oil refinery, sanctioning ships that have transported Iranian oil to Yemen’s Houthis, and sanctioning foreign nationals involved in Iranian oil trading. However, these relatively conservative measures have (predictably) been insufficient to move the needle on reducing Iran’s oil exports. Trump is likely frustrated by the lack of progress toward the “zero exports” goal and is looking to ratchet up pressure on Beijing to eschew Iranian barrels.
Q2: Which countries are implicated in Trump’s new announcement?
A2: It depends on which historical time period is used to define those countries that have bought Iranian oil. According to Vortexa, 10 nations received oil and/or petchem cargoes from Iran during the past three months. While the vast majority (81 percent) was taken by Chinese buyers, small volumes were received by the United Arab Emirates (UAE), India, Pakistan, Yemen, Singapore, Malaysia, Bangladesh, Sudan, and Oman. Across a larger 12-month period, even more countries (among them Syria, Vietnam, and Thailand) received Iranian cargoes, while during the past week, only China, Singapore, and the UAE did. The answer, therefore, hinges on which time horizon—past, present, or future—will define the set of countries to (interpreting the announcement literally, which we do not) face new punitive measures.
Q3: What’s the difference between imposing secondary sanctions on buyers of Iranian oil and cutting off all trade with countries that buy it?
A3: The economic consequences would be far more limited in the case of traditionally defined secondary sanctions than in a full trade cutoff. Secondary sanctions punish third-party buyers of sanctioned goods (in this case, Iranian oil) that have no nexus with the United States. For example, if secondary sanctions were to be enforced on Indian buyers of Iranian petroleum products, then those Indian buyers would be prohibited from doing business with the U.S. Department of the Treasury and the dollar-based financial system.
On the other hand, disallowing Iran’s oil customers from doing business with the United States “in any way, shape, or form” goes far beyond secondary sanctions, and even beyond Trump’s novel concept of “secondary tariffs,” which would impose duties on goods exported by participating countries to the United States. Taken literally, it would halt such trade as the $584 billion U.S.-China goods trade and the $129 billion U.S.-India trade.
Again, this very severe scenario of total trade cutoffs with implicated countries is likely not what Trump intended to convey. Instead, it seems like additional “saber rattling” to reduce China’s risk tolerance for taking Iranian barrels.
Q4: Why have the steps taken by the Trump administration to materially reduce Iranian exports been unsuccessful?
A4: Mainly because they have been extremely limited in scope, but also because the threat of sanctions has been superseded by the trade war.
For example, China is said to have well more than 100 independent (“teapot”) refineries; the aforementioned sanctioning of just one unit, along with the exclusion of the larger state-owned oil refineries, is not nearly enough to cut into the Iranian oil flow to China. But working-level officials at the Department of State and the Department of the Treasury are required by executive authorities to establish solid evidence of illicit activities before recommending assets and persons to be sanctioned. This burden of proof is an important factor limiting the number, frequency, and scope of U.S. measures to crack down on sanctions-busting activities.
On the geoeconomic level, the fierce trade war imposed on China by the Trump administration since early April has, perhaps paradoxically, diminished Washington’s leverage over Beijing with regard to doing business with Iran. After all, the current 145 percent composite tariff rate on Chinese-origin goods exported to the United States imposes a far harsher penalty on China’s economy than would secondary sanctions, partly because China is not highly vulnerable to being squeezed out of the U.S. dollar financial ecosystem. From this perspective, the tariffs have already inflicted maximum pain on Beijing, so why not continue to import discounted Iranian oil products?
Q5: Bottom line, how is Trump’s changing posture likely to affect oil prices?
A5: Unless Trump intends to halt business altogether with China and other buyers of Iranian petroleum products, or Beijing is deterred from the oil trade with Tehran, yesterday’s announcement won’t do much to push Iranian barrels off the market or keep prices elevated. In this case, Trump has options to further ratchet the pressure. He could, for example, issue new authorities allowing sanctions from a lower evidentiary standard for illicit activities. This could open the door to sanctions against China’s larger state-owned oil entities—a more disruptive and painful outcome for Beijing.
Away from the sanctions regime, short-term oil price direction will be set by downward demand revisions as the economic outlook darkens, the amount of oil supply coming in June from the Organization of the Petroleum Exporting Countries and its partners (look for indications this weekend), and whether Trump chooses diplomacy or war in confronting Tehran. Israel poses the biggest wildcard, as it could decide to unilaterally attack Iranian oil assets—a very different approach to removing Iranian barrels from the market.
Clayton Seigle is a senior fellow in the Energy Security and Climate Change Program and holds the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies in Washington, D.C.