If you believe the Chinese government, the country does not import any oil from Iran. Zero. Not a barrel. Instead, it imports lots of Malaysian crude. So much so that official Chinese customs data showed it somehow buys more than twice as much Malaysian oil as Malaysia actually produces.
Impossible? Well, of course. The reality is that China simply rebrands every barrel of Iranian crude it imports as Malaysian — the easiest and cheapest way to defy US sanctions, oil traders say. It is not a small matter: “Malaysia” was China’s fourth-biggest foreign oil suppler last year, behind Saudi Arabia, Russia and Iraq.
US lawmakers, frustrated with the White House’s passivity, are trying to force US President Joe Biden into action. On Saturday last week, the US House of Representatives passed the Stop Harboring Iranian Petroleum Act, known as SHIP. The Senate unanimously passed the legislation on Tuesday. Biden signed it into law on Wednesday.
The truth is, the US does not need new sanctions on Iranian oil — it needs to enforce the ones it already has.
For the past several years, either the White House has turned a blind eye to surging Chinese purchases of Iranian oil, with Biden seeming to be more concerned about rising oil prices than increased Iranian oil output, or the web of Chinese and Iranian obfuscation has outwitted US officials. I am not sure which would be worse, but the result is the same: Iranian oil production last month surged to a six-year high of 3.3 million barrels a day, up 75 percent from the low point of 1.9 million barrels during the “maximum pressure” sanctions applied by then-US president Donald Trump in late 2020.
At current prices, even after the discounts that Iran is obliged to offer, those additional barrels sell for more than US$100 million a day — or about US$3 billion a month. The windfall could not have arrived at a better time for Tehran, which desperately needs cash after months of street protests in 2022 and last year, and to support its proxies in Syria, Iraq, Yemen, Lebanon and the Palestinian territories.
As much as the current system has loopholes, the new legislation has many, too.
First, it does not start applying until 180 days after Biden signs it into law. The earliest the first sanctions can apply is a week before the US presidential election.
Second, it calls for sanctions for those ports and refiners who “knowingly” deal in Iranian oil. However, it allows anyone to claim innocence if they can produce paperwork that says the barrels originated somewhere else: “A foreign person shall not be determined to know that petroleum or petroleum products originated from Iran if such person relied on a certificate of origin or other documentation confirming that the origin of the petroleum or petroleum products was a country other than Iran, unless such person knew or had reason to know that such documentation was falsified.”
Timm Schneider, an independent oil analyst, said that Iran has gotten quite good at ship-to-ship transfers, using variously flagged vessels, “which could make it easier for parties to argue they did not ‘knowingly’ buy Iranian crudes.”
Last year, Iran was the second-largest source of incremental oil production worldwide, behind only the US shale industry. So far this year, oil production keeps creeping up, with another peak expected this month just as Israel and Iran are firing missiles at each other. The new US legislation is unlikely to alter that picture for Iranian crude. However, the SHIP legislation could have an impact next year.
The act would require the US government to publish an unclassified report within six months detailing the true nature of Iranian oil exports, how Iran labels its crude and how it smuggles it.
The report, to be produced by the US Energy Information Administration (EIA), is likely to confirm what everyone in the industry already knows: Iran’s output is surging, and most of its oil ends up in China.
However, a research report by an industry consultant or even an opinion column by a journalist is one thing; if the EIA reaches the same conclusion, whoever is installed in the White House next year would have to respond.
The act would also require the US Department of State to deliver a “strategy to counter the role of” China in the “evasion” of US sanctions, with a focus on the number of vessels involved in oil smuggling between Iran and China, and any “interference” from Beijing preventing the US from enforcing the embargo.
The legislation is a step in the right direction, but it comes too late, with too many caveats, and leaves way too much discretion to the White House. Until the November elections, Tehran still has a green light to export as much oil as it can. After that, we shall see.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is coauthor of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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