Policy Innovations Digital Magazine (2006-2016): Briefings: U.S. Pressures Oil Companies to Leave Iran

This time last year, newly elected President Barack Obama made a televised address to the Iranian people for Nowruz, the Iranian New Year. The address was one of the most direct signals of diplomacy with Iran since the 1979 breakdown of relations between the two countries, yet it was ultimately rebuffed along with other diplomatic overtures throughout 2009. This week Iran again celebrated Nowruz, but Washington's attitude toward Iran has shifted since the contested Iranian election in June 2009, which maintained incumbent Mahmoud Ahmadinejad as president amid bloody protests and allegations of ballot fraud.

In recent months, foreign oil companies have backed out of supplying oil to Iran as Congress passed legislation to expand sanctions on the sale of petroleum and refined petroleum products to the Islamic Republic. Although Iran has some of the largest oil fields in the world, the country uses outdated technologies, making it inefficient at extracting and refining petroleum. As a result, Iran relies on imports from other countries to meet domestic energy demand. Several oil companies have attempted to work with Iran to build up its domestic oil fields and refining capability, but these efforts have lagged due to U.S. pressure.

While Washington has pressured foreign oil companies doing business with Iran in the past, the recent pace of departure marks a significant shift. Since the start of 2010, oil giant Royal Dutch Shell stated it would no longer sell gasoline to Iran, along with Glencore (Switzerland), Vitol (Switzerland), and Trafigura (Amsterdam). British Petroleum and Reliance (India) stopped selling to Iran in 2009. With this series of departures, Iran now imports its oil from only five sources: Total (France), Lukoil (Russia), Petronas (Malaysia), Independent Oil Group (Kuwait), and Chinese companies. [Lukoil declared just this week that it, too, would divest.]

Companies that have left Iran cite the political situation as cause for departure, though the unrest is nowhere near the violence and instability in Nigeria—with its armed militias and ailing absentee president—where many of them also do business. The greater influence may be U.S. pressure on the oil companies for four major reasons: 1) Continued unrest following the June 2009 election; 2) Iran's rejection of diplomatic gestures made by the Obama administration; 3) Revelations concerning a second Iranian facility for enriching uranium; and 4) An impasse on pushing sanctions through the United Nations Security Council due to Russian and Chinese resistance.

While Nowruz last year hinted at better ties with the United States, Nowruz this year presages greater economic isolation for Iran in the international arena. Actions throughout 2009 imply that the Iranian leadership feels no need to engage with the West diplomatically in order to achieve political stability and economic growth. Given that it took 30 years for the United States to strike a conciliatory tone with Iran, this stance seems more cautious than cavalier.