In a new commentary from the Center on Global Energy Policy, Senior Research Scholar Richard Nephew outlines four potential paths forward for the Joint Comprehensive Plan of Action (JCPOA) and their implications for energy markets.

With new political turmoil in Iran, Nephew notes that the calculus inside the Trump administration is shifting in the lead up to the President’s January 11 deadline to confirm whether the JCPOA is in the US national security interest, whether Iran is complying with its terms, and more importantly, whether the US will continue to waive sanctions against Iran.

Prominent voices outside the administration are calling for suspension of sanctions relief in support of Iranian protesters, with the goal to generate pressure on the Iranian system. However, others have stressed such a decision would deflect attention away from Iran’s internal problems and give the leadership an opportunity to divert blame for domestic economic issues to the United States.

Nephew’s four scenarios include:

Keep at a simmer with the status quo. The baseline scenario is that the Trump administration continues to waive the sanctions while putting pressure on the Iranian government and others to improve the terms of the JCPOA. Under this scenario, there would be no impact on energy markets other than a marginal improvement in the level of certainty to those seeking to invest in Iran.

Turn up the heat by setting a deadline for waiver termination. The Trump administration would continue to waive sanctions but set a 2018 date of termination absent either Congressional legislation that “fixes” the JCPOA by establishing sanctions snap-back if Iran expands its nuclear program as JCPOA restrictions come off, or improvements in the deal itself. This scenario would establish a redline that the Trump administration would be forced to manage. From a market perspective, such a redline would continue to chill investment in Iran and reduce Iran’s incentive to continue to abide by the terms of the JCPOA. There may be energy market implications, though probably not in terms of immediate Iranian oil and gas supply. The problems would be more nascent and anticipated rather than near term or concrete.

Set fire to the kitchen by terminating waivers. The president could deliver a mortal wound to the JCPOA by terminating sanctions waivers. The Trump administration could permit some kind of wind-down period (the Obama Administration gave guidance to the effect of a plan for a 180 day wind-down) or it could refuse to do so.  This is particularly complicated with respect to the oil purchase sanctions that exist, as they have a built-in 180-day start up requirement.

Regardless, there would be substantial market turmoil (not to mention political upset) with such a decision.  Contacts in the energy trading community suggest that there is almost no expectation that the Trump administration could end the waivers as soon as mid-January and, consequently, there is little planning being done with this in mind.

Light a long fuse instead. Instead of killing the waivers outright, the Trump administration could choose a hybrid approach, announcing a decision to terminate the waivers at a future date. This approach would be accompanied by considerable market concern given changes to the entire operating basis of investment. The question would not be if the JCPOA would fail, but rather when.

Nephew concludes by calling for caution from camps arguing for reimposition of sanctions against Iran. “Just as JCPOA supporters were cautious—perhaps to a fault—to make clear that they could not guarantee changes in Iran desired by the United States,” he writes, “so too do those who advocate for the reimposition of sanctions have a responsibility to temper their enthusiasm with caution. A decision to reimpose JCPOA-suspended sanctions could increase the pressure on the Iranian government and result in changes for the better, or it could lead to the isolation of the United States internationally and the deflection of blame for Iran’s economic conditions onto the United States as an easily identifiable foil. Either way, the decisions that Donald Trump will soon make will play a considerable role in the approach that the United States will take.”