The fact that oil traders constantly redirect oil cargoes around the globe explains why most analysts expect sanctions to reduce global oil supplies by less than 500,000 barrels a day. A shift on this scale would be smaller than the 700,000-barrel collapse of Venezuelan oil exports since last year, and much smaller than the increase in US daily output of 1.1 million barrels projected over the next 12 months, not to mention the probable reduction in global oil demand caused by the sharp increase in prices since last summer.
In short, the Iran sanctions will have less impact on the global balance of supply and demand than the performance of the world economy and the behavior of other oil producers. This suggests another reason why the US-Iran confrontation could lead to lower, not higher, prices: Trump and his Saudi allies now have a very strong political incentive to resist further upward pressure on oil prices.
Rising gasoline costs have already reversed almost half the gains from this year’s tax cuts for middle-class Americans. If oil prices rise much further during the summer “driving season” that starts in the US about now, Trump will be blamed by voters and Republicans could suffer in November’s midterm congressional elections, especially in Midwestern swing states.
Assuming that Trump now finds it politically expedient to curb oil prices, the Saudi leadership can be expected to offer him whatever support he requires. On the other hand, Iran and Russia, which had previously been less hawkish than Saudi Arabia about OPEC pricing, might now support tougher supply restraints, precisely because a sharp rise in oil prices could cause a punishing backlash against Trump.
Past experience suggests that US and Saudi political interests are likely to prevail, at least in the short term. That was certainly true after the two Iraq wars. Oil prices plunged by 45% in1991, and by 35% in 2003, within a month of the US launching its attacks. A fall on this scale seems inconceivable today, but oil prices are likely to head downward, despite the Iran sanctions – or maybe because of them.
Anatole Kaletsky is chief economist and co-chairman of Gavekal Dragonomics. A former columnist at the Times of London, the International New York Times and the Financial Times, he is the author of "Capitalism 4.0, The Birth of a New Economy," which anticipated many of the post-crisis transformations of the global economy.