The black market for oil will continue to thrive

The political and economic background is important to understand what’s coming next in the black market for oil. The attention is on Russia and Iran, which together pump about 15% of the world’s crude.

By Javier Blas

Oil smuggling isn’t easy, but it’s so enormously profitable that obstacles only slow it down. Sure, the authorities can make dealing illicit barrels a bit less financially rewarding; ultimately, however, the oil will flow.

And it’s flowing. Russia, Iran and Venezuela, the three major oil producing countries under Western sanctions, are still pumping about 16 million barrels a day of crude and other oil liquids. Assume the trio is selling oil at a 20 per cent discount to market prices and do the math: that’s a cool $1 billion worth of oil a day.

I’m skeptical about the ability of the most recent round of sanctions and the promises of stricter enforcement of older ones to halt illicit trading. The measures will create more friction and make smuggling more difficult and probably less profitable, forcing sellers to offer larger discounts. But they won’t meaningfully reduce the flows, let alone stop them.

The sums involved are so vast and the business so lucrative that everyone involved — sellers, buyers and intermediaries — is highly motivated to find alternative routes, tricks and ploys to keep the wheels turning. Over time, the enforcers grow tired and the smugglers become wiser.

It doesn’t help that not everyone considers Russian, Iranian and Venezuelan crude as illicit. For China, India and many other developing countries, their barrels are as good as any.

Moreover, the countries imposing the sanctions have an incentive to go easy on the smugglers to keep the price of oil down, and would need to persuade everyone else, particularly Beijing and New Delhi, that more expensive crude is a price worth paying to enforce sanctions. There’s a historical precedent for that, with the success of the United Nations embargo on crude from Iraq and Kuwait in 1990-1991. But we’ve learned over the past five years that the West lacks the political will to stomach higher energy costs, and the Global South isn’t interested in supporting Washington, Brussels and London. The political appetite for strong sanctions is so feeble that even Japan, typically aligned with the US, only pays lip service to them.

The political and economic background is important to understand what’s coming next in the black market for oil. The attention is on Russia and Iran, which together pump about 15 per cent of the world’s crude.

Last week, US President Donald Trump signed a “presidential memorandum” ordering his administration to reinstate the campaign of “maximum pressure” and “drive Iran’s export of oil to zero.” On paper, it was a strong action. But Trump undermined his own thunder by saying, pen in hand, that he was “torn about” the memo. “Everyone wants me to sign it,” he said, adding “I’m signing this, but I’m unhappy to do it.” If that wasn’t enough, he made clear he ultimately didn’t want to disturb the flow of oil: “Hopefully we’re not going to have to use it.”

What’s more, the memo was long in words and short on actions. The US Treasury announced days later, in a separate statement, that it was imposing sanctions on the “network” Iran uses to evade American oil sanctions. The problem is, the move targeted a single large oil tanker and two small ones. Over the last few years, Iran has relied on more than 500 tankers to move its oil, of which nearly 60 per cent remain unsanctioned.

For now, let’s focus on the oil tankers, which continue picking up Iranian crude for export. Yes, a few of them are taking longer to find a buyer, and for now are storing crude on the high seas. But it’s only a matter of time — and a larger discount to market prices – before someone buys that oil. Moreover, Iranian oil production, when measured in its totality, is flirting with the highest level in 40-plus years. Tehran not only produces crude — the main focus of sanctions — but other petroleum products, such as condensates and natural gas liquids that have escaped any restrictions even more easily. The two last oil categories have seen a production boom in recent years. Put it all together, and Iran pumped last year about 4.5 million barrels a day, the third-highest volume since 1978.

Russia has been under sanctions since soon after the invasion of Ukraine, but Western politicians put the focus on keeping oil prices low rather than on restricting flows. On his last days in office, former President Joe Biden shifted the needle a bit, imposing the strongest penalties seen so far on Moscow. After the initial shock wore off, the smugglers worked on solutions: It’s taken Russia fewer than 25 days to find workarounds. Yes, the Kremlin is having to sell its oil at lower prices and pay more to transport it. Glitches abound, and some of the output has yet to find an ultimate client, forcing some tankers to become temporary floating storage facilities. But, overall, the oil is still flowing.

It’s a shameful policy failure, with inaction masked by rhetoric and words. So long as Western governments refuse to pay higher oil prices as the cost of crippling the black market, Russia, Iran and Venezuela will continue be able to sell their barrels.