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The Trump administration is set to end sanctions exemptions for eight countries, including South Korea, that buy oil from Iran, in a bid to put greater pressure on the Middle Eastern country. The U.S. has recently announced it will no longer grant sanctions waivers that were given last November and due to expire in early May, to any country that imports Iranian oil. 

Today, we’ll examine Washington’s decision on Iranian sanctions and its repercussions on Korea with Kim Dae-ho, director of the Institute for Global Economics. 

The oil sanctions issue has to do with Iran’s nuclear weapons development. During Barack Obama’s presidency, the U.S. and Iran agreed that the former would lift economic sanctions in exchange for the latter’s nuclear dismantlement. But after taking power, President Donald Trump concluded that Iran had failed to implement the agreement properly, although it pretended to do so outwardly. Trump complained that his predecessor had not arranged a legal framework to force Iran to dismantle its nuclear program. He proposed renegotiating with Iran, which, of course, rejected the idea. 

So the U.S. withdrew from the nuclear deal with Iran in May of last year and announced a ban on importing Iranian crude oil in November. Still, it gave six-month waivers to some countries. But the U.S. has now decided not to extend the current sanctions exemptions for Iranian oil, demonstrating its strong commitment to curbing Iran’s nuclear program. 

The U.S.’s import ban on Iranian oil was aimed at blocking Iran’s main source of revenue. Nonetheless, last November the U.S. issued 180-day waivers to eight countries, including South Korea, China, India and Turkey. But on April 22, U.S. Secretary of State Mike Pompeo said the U.S. would end exemptions for the eight countries. The U.S. also warned that even its allies, including South Korea, would face sanctions if they continue to buy Iranian oil after the waiver expires. The news came as a shock to Korea, which has made efforts to extend the exemptions. 

South Korea imports 100 percent of its crude oil from abroad. Iranian oil, in particular, is considered suitable for Korea’s industrial structure, and it is common for Iran to pay for South Korean goods via oil. So it is far more advantageous for Korea to import oil from Iran than from other countries. 

The U.S. knows this, and Korea believed that the U.S. would consider this situation when making relevant decisions. Trade and foreign affairs ministries in Korea have actually made great diplomatic efforts to gain an extension to the waivers. 

The foreign affairs ministry in Korea says that it will continue to convey its position to the U.S. until the May deadline to extend the exemptions, but the U.S. is unlikely to change its stance. Washington’s decision on its Iran sanctions will inevitably deal a blow to some Korean enterprises. 

Considering the oversupply in the global oil market and that there are other oil-producing countries, Korea could transition to alternatives without much difficulty. Therefore, the U.S. decision to end sanctions exemptions for Iranian oil imports will not have extreme consequences for Korea, such as crippling the economy. 

But in the course of finding alternatives, Korea may have to purchase oil in the spot market. It will entail costs, as oil is mostly traded in the futures market. Also, Korea will no longer benefit from the mechanism of bartering its goods or services for Iranian oil exports. 

The Korean government has so far reduced imports of Iranian oil. Iranian crude oil accounted for 13.2 percent of Korea’s total oil imports in 2017, but it decreased sharply to 5.2 percent last year. It is very unlikely that the expiration of the sanctions waivers will lead to a major oil crisis in Korea. 

But the Trump administration’s decision is expected to take a toll on Korea’s petrochemical industry which mainly imports condensate, an ultra-light form of crude oil, from Iran. Iranian condensate has a higher concentration of naphtha, the basic material to create plastic, and its prices are relatively cheap. For Korean businesses, the replacement of Iranian condensate will result in lower productivity and profitability. 

On the other hand, the Korean shipbuilding and steel industries are expected to take advantage of rising oil prices. Falling oil prices caused orders for offshore plants to decrease, making local shipbuilders struggle. But if oil prices continue to rise this year, global oil majors will order more offshore plants. Also, rising demand for crude oil will lead to the production of more oil carriers. As a result, the steel industry is expected to improve their returns by supplying more steel to shipbuilders. 

There are concerns, though, that a drastic rise in oil prices will adversely affect the global economy. 

The U.S. says the decision is intended to bring Iran’s oil exports to zero and that it will maintain maximum pressure on Iran. Now Iran has reached a crossroads where it has to decide whether to renegotiate with the U.S. over the nuclear issue or to confront them. If driven into a corner, Iran may make an extreme choice, like a desperate mouse suddenly attacking a cat after being pursued. Industry watchers are concerned about the possibility of Iran closing the Strait of Hormuz. Since the strait is used for much of the global oil supply, experts say that oil prices may triple if it is blocked.

The U.S.’s announcement is drawing a strong backlash from Iran. On April 22, Iran’s Islamic Revolutionary Guard Corps warned that it might shut down the Strait of Hormuz, the passageway into the Persian Gulf. It is an important oil shipping route for oil-producing nations such as Saudi Arabia and Kuwait, and one-third of the world’s oil supplies pass through this strait. 

In the past, Iran has often threatened to close the strait amid escalating tension with the U.S., but it has never put the threat into action. If Iran chooses to block the strait, oil prices are expected to jump to 200 dollars per barrel. So it’s important for South Korea to diversify sources of oil imports. 

When countries can no longer import oil from Iran, they have to find other oil-producing countries. Washington wants them to buy oil from the U.S., which is another significant oil producer. 

South Korea has bought an increasing amount of oil from the U.S. since last year—more than from Iran. Korea’s trade surplus with the U.S. has led to trade friction between the two nations. It’s not a bad idea to channel oil imports away from the Middle East towards the U.S. 

It is true that Korea’s oil imports have so far been concentrated too much on the Middle East, despite n fact that some countries in other parts of the world including Venezuela, contribute to falling oil prices. South Korea needs to diversify its oil suppliers and secure alternative oil, not only to cope with the sanctions waiver problem in the short term but to reduce economic risks in the long term. 

This year, global oil prices have been traded at around 70 dollars a barrel on average. While oil prices rose in the first quarter largely due to production cuts of the Organization of Petroleum Exporting Countries, geopolitical conflicts such as the U.S.’s sanctions against Iran are likely to influence oil prices in the second quarter. 

For now, it is hard to predict how significantly oil prices will fluctuate in the coming months. Korea needs to closely analyze potential downside risks and come up with proper countermeasures.