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How Pulling Out of the Iran Nuclear Deal Could Hurt the U.S. Economy

4 minute read

President Donald Trump promised crippling sanctions targeting Iran and anyone that helps develop its nuclear program as he announced the U.S. will withdraw from the Iran nuclear deal.

“We will be instituting the highest level of economic sanction,” Trump said in remarks at the White House. “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States.”

But one country the sanctions could also hurt that he didn’t mention: the United States.

The new sanctions will target the Iranian oil sector, reducing energy companies’ business with Iran and increasing the price of oil. But the reduced Iranian supply could lead to sustained high oil prices and further geopolitical instability, in turn contributing to inflation and slowing economic growth at home.

“The consumers are going to shoulder the bill,” says Greg Sharenow, an executive vice president at PIMCO, an investment management firm. “The U.S. economy will face headwinds from prices that will come as a natural result of this.”

Read More: How Talks with North Korea Convinced Trump to Scrap the Iran Deal

The consequences of withdrawing from the agreement may not be clear in the short term. In fact, Iranian oil production will likely remain steady or even increase as foreign companies try to establish a higher baseline from which to negotiate reductions.

But the effect of sanctions will likely pick up as sanctions take effect, analysts say. A report from Barclay’s bank suggests that Iranian oil supply could be reduced by up to 600,000 barrels per day, approximately a third of its exports in 2016. The country was the world’s fifth greatest oil producer in 2017.

The prospect of losing Iranian oil supply is one of many factors that has led prices of the commodity to rise rapidly in recent months to more than $70 a barrel, up nearly 50% from over a year ago. Falling production in Venezuela amidst the country’s political upheaval, general geopolitical instability in the Middle East and cuts to production orchestrated by OPEC and Saudi Arabia have all contributed to high prices.

Energy companies in the U.S. could potentially make up for some the supply difficulties by increasing production of abundant shale and offshore oil. Indeed, some analysts say they expect the U.S. supply could stem the effects of lost Iranian supply.

But those companies face their own set of challenges. The U.S. oil and gas industry faces a labor shortage particularly in some of its high-growth regions and the industry has struggled to build the pipeline infrastructure necessary to ship their product around the country. The companies are likely to spend additional revenue from higher prices on share buybacks, distributions to shareholders and paying down debts, says Sharenow.

Americans consumers may soon notice the pinch. Retail gas prices have ticked up and are expected to be at the highest summer levels in four years, according to a projection from the Energy Information Administration. Consumers in the past have cut spending as gas prices eat into their discretionary budget.

The White House appears aware of the threat that rising oil prices pose to the economic growth of the Trump era. Trump himself targeted OPEC on Twitter in April as oil prices continued to rise.

Beyond tweets, the Administration could try to push Saudi Arabia and other oil rich allies to increase production. But Saudi Arabia benefits from increased prices and the IMF estimates that the country will need prices at $70 a barrel to break even. Saudi officials have said they would like to see prices continue upward. Indeed, the country orchestrated a production cut with OPEC and Russia to nudge prices in that direction. But Saudi officials also do not want prices to cross $100 a barrel, according to a Wall Street Journal report.

“The Saudis have signaled that they’re interested in continuing,” says Antoine Halff, a researcher at Columbia University’s Center on Global Energy Policy and the former chief oil analyst at the International Energy Agency. “Their price appetite is only increasing.”

That means a higher bill for the U.S. — and a new economic and geopolitical challenge for Trump.

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Write to Justin Worland at justin.worland@time.com