If Iran Strikes a Deal…?

This article appeared in Vol. 10, No. 6 - 2013


After years of frustration and stalemate in the negotiations on Iran’s nuclear programme between Iran and the six world powers (the five permanent members of the UN Security Council plus Germany), it is way too early to talk about a breakthrough. However, the proposal tabled by the Iranian foreign minister in October, and the seriousness displayed by Iran to address the concerns of the western world over the military potential of the country’s nuclear programme, could suggest that changes are underway.

Optimists had hoped that the negotiations would lead to a temporary agreement whereby the world powers would grant minor sanctions relief in exchange for a freeze on the nuclear programme. After three days of intensive diplomatic efforts the parties left the negotiation table empty-handed, concluding that progress had been made but that there were still issues outstanding.

Iran wants to succeed in what it considers the first important step in a process that it hopes to finalise in 6 to 12 months. The initial stage is intended to establish an agreed framework between the six powers and Iran to define the ‘end state’ of Iran’s nuclear programme and the common goals for the negotiations. In practice, this means that the Iranian government wants the West to recognise the country’s right to extract uranium in limited volumes for its nuclear programme. Once the parties have reached an agreement on this, they can make concrete plans for limiting Iran’s uranium enrichment and gradually lifting the sanctions which have crippled the Iranian economy, with resultant galloping inflation and double-digit unemployment.

Oil exports account for 80% of the country’s total export revenues and for 50–60% of government revenues. Since the end of 2011 Iran’s oil production has plunged from 2.5 MMbpd to just 900,000 bpd in July this year, and in August 2012 it moved below the level of arch-rival Iraq for the first time since 1989.

Less Volatile Oil Price

Even if Iran and the world powers succeed in striking a temporary deal, the hurdles to be overcome to reach a long-term agreement are very significant. We do not expect to see any major changes to Iranian oil exports until well into 2014 at the earliest, but it is interesting to consider the effects on the oil market and price if the sanctions were lifted.

Let’s assume that Iran succeeds in convincing the West that it will reduce its uranium enrichment and financial sanctions are lifted. Iran would then be able to boost its production to 2.9 MMbpd, which is its total production capacity in 2014 according to the IEA. If these barrels were released in the market without any production cuts by the other OPEC members, prices could drop US$3–5/barrel. However, it is unlikely that Saudi Arabia, the de facto leader of the cartel, would allow the market to be flooded with oil, so we would expect it to cut its production, thus increasing its reserve capacity and providing a more solid buffer in the market without reducing its oil revenues too dramatically. Oil prices would only change marginally, but the market would be more balanced and oil prices less volatile. 


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