Explained: US approves sanctions relief for Iranian oil amidst its war with Tehran

In an unprecedented move to lower oil prices amid the global energy crisis triggered by the war in West Asia, the Trump administration said it plans to remove sanctions on Iranian oil. This comes a week after its temporary sanctions waiver on Russian oil.

US Treasury Secretary Scott Bessent said the move would compensate for the oil shortages and prevent Tehran from profiting from hiked oil prices.

“We will be using the Iranian barrels against the Iranians to keep the price down for the next 10 or 14 days as we continue this campaign,” Bessent told Fox Business on Thursday.

The US-Israel war against Iran has effectively choked trade in the Strait of Hormuz – the narrow channel accounting for a fifth of global energy supplies – raising fuel prices, with the Islamic Republic targeting energy facilities of Washington’s allies in the Gulf.

The sanctions exemption would apply to about 140 million barrels of Iranian oil that are currently at sea. Bessent added that the unsanctioned oil could go to countries such as Malaysia, Singapore, Indonesia, Japan and India.

Since the war started on February 28, Iran has continued to export its oil, most of which is sold to China, despite the sanctions. Meanwhile, the US’s strategic allies in the region, housing its bases (Saudi Arabia, UAE, Qatar, Bahrain, and Kuwait), have had their tankers halted. While targeting their assets during the war, Iran vowed that not one litre of oil would be exported.

A timeline of US sanctions on Iran

A period of generally cordial relations between the US and Iran was first strained during the Islamic Revolution in Iran in February 1979, which ended Iran’s monarchy and replaced it with the Islamic Republic. The Shah of Iran, Mohammed Reza Pahlavi, a pro-West leader, was toppled by opposition forces aligned with the vehemently anti-American Shia cleric Ayatollah Ruhollah Khomeini. The Ayatollah then said that Iran would try to “export” its revolution to its neighbours.

However, things truly came to a head that November when a group of Iranian students — who had initially planned a sit-in at the US embassy — forced a takeover of the premises, taking 98 Americans hostage. The ensuing crisis caused Washington to sever all ties with Tehran, sanction Iranian oil imports, and freeze Iranian assets. After 444 days, the hostages were released, with the US promising not to interfere in Iran’s politics.

Sanctions against Iran were intensified under the George HW Bush and Bill Clinton administrations. The Iran-Iraq War, passed by Congress in 1992 in the wake of Gulf War I, sanctioned materials that could be used to develop advanced weaponry. In 1995, these were expanded further to a complete oil and trade embargo, with the Iran and Libya Sanctions Act barring non-American companies from investing amounts exceeding $20 million in Iran’s oil and gas sectors. Some sanctions would be lifted in 2000.

A breakthrough was realised under the Obama administration, and materialised in the Joint Comprehensive Plan of Action in 2015, the agreement reached by Iran with the permanent members of the UN, Germany, and the European Union. Iran agreed to undertake a series of steps, including redesigning its Arak nuclear reactor, allowing intrusive verification mechanisms, and limiting uranium enrichment for 15 years.

The first Trump administration reversed this, announcing in 2018 that the US would withdraw from the JCPOA and introduce a renewed sanctions campaign to exert “maximum pressure” on Iran. The Biden administration (2021-25) signalled a return to the JCPOA but subsequently announced sanctions against the parties involved in the 2022 crackdown on women-led protests denouncing Supreme Leader Ayatollah Khamenei.

What this means for the US

Bessent’s suggestion reflects the Republican Party’s desperation to reduce oil prices ahead of the US mid-term elections in November. The widespread unpopularity of the war – a poll by The New York Times noted only 41% public support for it – could tilt the numbers in the Democratic Party’s favour in the midterms.

Trump rode a wave of anti-interventionist sentiment into office, criticising the Biden administration’s investment in the war in Ukraine and arguing that the White House should focus on domestic issues first. His actions thus far have contradicted this. The temporary waiver of sanctions is an attempt to contain the fallout from the energy crisis and cushion the blow on American consumers.

A week ago – after having made a scramble out of the rationale, objective and status of the war in public – Trump, in an attempt to draw a silver lining from the fuel price surge, said that the US “is the largest Oil Producer in the World, by far, so when oil prices go up, we make a lot of money.”

Earlier this week, Trump went on to say that the US gets only “1%, 2%” of its oil from the Strait, but owing to the Strait’s share in global markets, a cascading effect on US gas prices is imminent.

Regardless of his defences, a large number of American households have already begun feeling the pinch of the energy bottleneck. A recent Reuters/Ipsos poll found that 55% of respondents have “somewhat” been impacted by the gas prices. Among Republican supporters, 42% gave the same answer.

On Friday afternoon, benchmark Brent crude was trading at around $103 per barrel, approximately 41% higher than nearly $73 per barrel since the war started.

The crisis at hand is so severe that last week the International Energy Agency (IEA) — a coalition of 32 countries — agreed to release 400 million barrels of oil to address the supply disruption. To put it into perspective, in 2022, after Russia invaded Ukraine and the West imposed sanctions on Moscow’s oil, only 182 million barrels were released.

Trump also authorised the Department of Energy to release 172 million barrels from its strategic reserves starting in late March 2026.

Ironically, Trump faces a challenge similar to what Biden dealt with in 2022, when global oil prices were rising sharply before the midterm elections – and to keep prices stable, the White House exempted Russian energy exports from sanctions.

Sanctions relief for Russia

The US last week granted a temporary sanctions waiver on 130 million barrels of Russian crude stranded at sea. Bessent – who had championed the Trump administration’s move to tariff countries importing Russian oil – argued that the decision “will not provide significant financial benefit to the Russian government.”

Last year, the US had been pressuring India to abandon Russian oil imports – applying punitive tariffs of 25 per cent in addition to the 25 per cent reciprocal tariffs – in a bid to isolate Moscow. Bessent, Trump and his aides had singled out New Delhi, asserting that the purchases were fueling the war in Ukraine.

Before February 28, in the backdrop of trade deal talks with Washington, New Delhi had reduced its Russian oil imports to an average of 800,000 to 1 million barrels per day (bpd). The imports shot up around 50% from February levels, ship tracking data from Kpler revealed.