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Shraddha Bhatia
Dec 16, 2023
Rethinking Iran's Oil-Smuggling Challenge: The Case for a Multilateral Approach
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After the October 7th attacks by Hamas, calls for President Biden to impose stricter sanctions on Iran have increased tensions between the international community and the United States. Stringent sanctions were initially imposed in 1996 under former President Bill Clinton in response to the Iranian nuclear program and Iran's support for designated terrorist organizations (Katzman, 2022). However, President Biden “turned a blind eye to rising smuggling of Iranian crude”, prioritizing “an informal détente with Tehran, including a prisoner swap” and lowering oil prices instead (Blas, 2023). Additionally, President Biden has worked to maintain these low oil prices to improve his poll numbers for the upcoming 2024 elections. Stricter sanctions are predicted to raise oil prices to $100 per barrel, increasing global spending on oil by more than $10 billion (Schott, 2023). As discussions continue, there is speculation that the White House might opt to delay the implementation of harsher sanctions, capitalizing on the current stable oil prices until there is stronger evidence of Iran’s support for Hamas in the October 7th attacks (Blas, 2023). Given the complex history of sanctions and the potential impact on Iran's behavior, opting for a multilateral approach as seen in the Joint Comprehensive Plan Of Action (JCPOA) rather than tightening sanctions could be a strategic move for President Biden. Harshening sanctions might lead to Iran seeking loopholes to smuggle oil, as experienced in the past through their affiliation with teapot companies. A multilateral approach could provide a more cooperative environment, offering economic relief and encouraging adherence to international norms, potentially fostering improved diplomatic relations. This method aligns with the successes and lessons learned from the JCPOA nuclear deal and may prove to be a better choice to address the current situation.
The Biden administration's handling of sanctions policy on Iran has sparked heated debates amongst Republicans and Democrats, especially in light of the sophisticated oil smuggling operations facilitated by Iran and its substantial support for Hamas (King and Quiñones, 2023). In fact, Republican congressional lawmakers have condemned the administration's approach as an ill-advised strategy of "appeasement." These critics emphasize the need for stronger measures to curtail Iran's support for extremist groups and its pursuit of nuclear capabilities (King and Quiñones, 2023). This complex political situation is further complicated by the ongoing Israel-Hamas conflict, which has prompted renewed discussions about the effectiveness of the current sanctions strategy. The main challenge with the reinforcement of sanctions lies in the limited impact on the National Iran Oil Company's (NIOC) primary customer base: the teapot companies in China. Teapot refineries are small-scale, independent oil processing facilities in China, handling around one-fifth of the country's refining capacity (Calabrese, 2022). Due to their relatively small size and decentralized operations, these entities remain largely unaffected by the sanctions, thereby undermining the effectiveness of unilateral punitive measures. Since sanctions are ineffective in this situation, a diplomatic approach is preferable to achieve the same goal that sanctions are attempting to achieve: preventing Iranian oil smuggling, nuclearization, and support for Hamas. In light of this, the United States should ease existing sanctions on Iran in exchange for a multilateral agreement that incorporates comprehensive monitoring mechanisms.
Iran has established a sophisticated oil smuggling network, capitalizing on loopholes created by sanctions. NIOC primarily serves China's teapot refineries, ensuring that 95% of Iranian supplies are channeled to these entities, bypassing Western sanctions. This operation involves the use of old tankers purchased by obscure middlemen, often repurposed with disguised ownership through shell companies registered in various locations, including China, Vietnam, and the United Arab Emirates (The Economist, 2023). The vessels sail under flags of convenience, exploiting open registries that permit anonymous ownership, with prominent examples including Panama, Liberia, the Marshall Islands, Hong Kong, and Singapore. This deceptive approach facilitates the illicit transportation of Iranian oil, a strategy similarly employed by other sanctioned countries like North Korea, Russia, and Venezuela to deliver significant oil volumes to China on a daily basis (Mathews, 2023). Beyond the economic motivations, geopolitical considerations and strategic influence drive Iran's engagement in oil smuggling. As of January 2023, Russia stands as the world's most sanctioned country. In assisting Russia, Iran may be engaging in covert oil shipments, receiving support and investment in return to bolster Iran's military technology. Illicit trades also offer Iran strategic influence in the region through discounted and illegal transactions, a necessity when rivaling Saudi Arabia’s influence. Profiting from these activities, Iran can clandestinely smuggle weapons and oil to neighboring countries like Yemen, Syria, and Lebanon, effectively exerting influence over them as proxy actors (Adal and Fares, 2023).
A potential policy shift towards a multilateral approach could draw inspiration from the success of the 2015 Iran nuclear deal, the Joint Comprehensive Plan Of Action, providing a framework for collaborative diplomacy aimed at addressing the complex challenges posed by Iran's nuclear program and its support for extremist organizations (The Economist, 2023). The JCPOA aimed to regulate Iran's nuclear program and promoted international oversight, fostering stability in the region. Under this agreement, Iran committed to limitations on its nuclear activities, such as uranium enrichment and centrifuge usage, while receiving relief from certain nuclear-related sanctions. The JCPOA also enabled the International Atomic Energy Agency (IAEA) to monitor Iran's nuclear facilities and ensure compliance with the terms of the agreement. The lifting of the United Nations' embargo on conventional weapons and ballistic missiles was contingent upon Iran's adherence to peaceful nuclear activities, as verified by the IAEA (Robinson, 2023). Leveraging the principles of the JCPOA, a similar agreement could effectively monitor Iran’s oil smuggling, offering a diplomatic solution to address the ongoing issues. Adhering to this agreement could not only alleviate the economic impact of stringent sanctions, offering Iran greater economic opportunities and access to international markets, but also showcase Iran's commitment to international norms and transparency. This commitment has the potential to improve Iran’s relations with other nations, a pattern observed during the time when the JCPOA received full support.
Initially, the JCPOA showed progress as Iran met its obligations, resulting in the lifting of certain sanctions by the United States, the European Union, and the United Nations in early 2016. The oil sector, in particular, experienced a notable easing of secondary sanctions, allowing Iran's oil exports to rise substantially. Moreover, frozen Iranian assets amounting to roughly $100 billion were released, indicating a positive step forward for relations between the participating countries, including the United States and European nations, and Iran (Robinson, 2023).
However, the JCPOA encountered significant challenges, especially after the United States withdrew from the agreement in 2018 under the Trump administration. The reimposition of harsh banking and oil sanctions by President Trump dealt a severe blow to the JCPOA, leading to its near-collapse. President Trump's reasons for pulling out of the deal included concerns over the agreement's failure to address Iran's ballistic missile program, its regional proxy activities, and the sunset provisions, which raised fears of potential Iranian nuclear weapons development in the future (Robinson, 2023). In the context of the oil smuggling situation, the deal could incorporate a similar "snapback" mechanism to address concerns about potential violations by Iran. If any signatory suspects Iran of engaging in illicit oil smuggling activities, the UN Security Council, as part of the multilateral agreement, could vote on whether to reinstate sanctions. This mechanism would serve as a deterrent, ensuring that parties adhere to the terms of the deal. The "snapback" provision would remain in effect for a specified duration, offering a time-bound framework for addressing concerns related to Iran's compliance with the agreement. Based on the example from April of 2020, where objections were raised against unilateral implementation, it is clear that such a system can be a drawback without measures encouraging communication (Robinson, 2023). Thus, a deal addressing oil smuggling could emphasize the collaborative nature of such a system, requiring consensus among signatories before taking decisive actions.
Lessons from the JCPOA suggest that collaborative diplomacy could offer a viable framework for addressing the intricate challenges related to Iran's oil trade. Despite the limitations of sanctions, sustained diplomatic engagement and robust monitoring mechanisms are key. Iran may be inclined to participate in a multilateral agreement, agreeing to increased monitoring in exchange for eased sanctions, to mitigate potential economic repercussions and international isolation. This can be shown by Iran’s willingness to participate in the JCPOA for economic relief “of more than $100 billion in revenues in 2012–14 alone” (Robinson, 2023). However, challenges persist, with the National Iran Oil Company operating independently from the U.S. and the limited ability of the U.S. to influence teapot companies that are mainly under Chinese jurisdiction. Additionally, the intricate web of existing sanctions targeting various countries has stretched the capacity of the U.S., making facilitators of the oil trade challenging to address.
Foreign governments may be hesitant to intervene due to factors relating to geopolitical considerations. The potential backlash from Iran, including diplomatic tensions and economic repercussions, could lead to strained relations, especially considering the ongoing conflict in the region, and disruptions in diplomatic negotiations. Furthermore, the intricate nature of Iran's oil smuggling network and the complexities of the global oil market have presented significant challenges for international regulatory bodies in effectively monitoring and disrupting these activities. As for the incentive to act, foreign governments may be motivated to address Iran's oil-smuggling operations due to the potential consequences on global oil markets, concerns about regional stability, and the need to uphold international sanctions agreements.
Addressing Iran's oil-smuggling operations may have significant implications for global oil transportation and pricing. Reimposing sanctions could potentially lead to a reduction in Iran's oil exports, impacting the country's economy. The National Iran Oil Company and the teapot companies may encounter difficulties in procuring Iranian oil, potentially impeding Iran's economic recovery and growth (The Economist, 2023).
To ensure effective monitoring, the international community should adopt a collaborative multilateral approach, similar to the one used during the JCPOA. This strategy could involve enhanced information sharing and robust regulatory measures to prevent illicit activities and maintain compliance with international sanctions agreements. Sustained diplomatic engagement and transparency efforts may contribute to the stability of the global energy market.
The views expressed in this publication are the author’s own and do not necessarily reflect the position of The Rice Journal of Public Policy, its staff, or its Editorial Board.
References
Adal, Laura, and Sarah Fares. “Petroleum and Politics: Oil Smuggling and the Iran–Saudi Regional Rivalry.” Global Initiative Against Transnational Organized Crime, 27 Jan. 2023, globalinitiative.net/analysis/oil-smuggling-iran-saudi-arabia/.
“America Would Struggle to Break Iran’s Oil-Smuggling Complex.” The Economist, The
Calabrese, John. “Something’s Brewing: China’s ‘Teapot’ Refineries and Middle East Oil Producers.” Middle East Institute, 19 May 2022, www.mei.edu/publications/somethings brewing-chinas-teapot-refineries-and-middle-east-oil-producers.
Katzman, Kenneth. “Iran Sanctions.” Congressional Research Service, Congressional Research Service, 2 Feb. 2022, sgp.fas.org/crs/mideast/RS20871.pdf.
Mathews, Roy. “‘Flags of Convenience’ Flout Iran Sanctions.” The National Interest, The Center for the National Interest, 7 Oct. 2023, nationalinterest.org/feature/flags-convenience flout-iran-sanctions-206893.
Quiñones, Manuel, and Bob King. “Biden’s Choice: Let Iranian Oil Flow or Watch Prices Rise.” POLITICO, 12 Oct. 2023, https://www.politico.com/news/2023/10/12/biden-iran-oil-gas-prices-00120924.
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