The Iran Nuclear Deal and World Energy Markets

Iran

Energy Policy

Commentary

Dr. Massaab Al-Aloosy

The revival of the 2015 nuclear deal between Iran and the “P5+1” powers, if all parties come to an agreement, will have ramifications on the global energy market, assuming agreement. Iran holds massive oil and natural gas reserves and with sanctions relaxed, new foreign investment will increase its production of both. Once a new product hits the market energy prices will inevitably decrease. Iran also borders Central Asia and can serve as a gateway to the energy resources of these countries, leading to less Russian leverage on oil and gas supplies. Finally, the deal can potentially calm Iran’s turmoil-filled region, which would affect the price of oil by decreasing tensions in the Middle East and allowing for safer and more cost-effective extraction and transportation

Iranian Energy Sector

Given that Iran has one of the largest oil reserves in the world; the return of Iranian oil exports to international markets, assuming the revival of the nuclear deal, will have a tremendous impact on the global oil trade. Iran’s oil reserves account for 25 percent of in the Middle East’s proven reserves and 12 percent of the world’s. Tehran’s production, however, has been limited because of international sanctions, especially after the “maximum pressure” policy initiated by the previous U.S. administration in 2018.

Today, Iran produces 2.4 million barrels per day and plans to increase its production to 3.8 million barrels per day as soon as sanctions are lifted. Iranian Oil Minister Javad Owji also indicated that his country plans on increasing the production level to 5.7 million barrels per day, although he did not provide a timeframe for when this could be accomplished. The large quantity of oil Iran has in floating storage will supplement the increase in production. Sanctions forced Iran to increase its floating storage facilities, which have jumped from 30 million barrels to 103 million barrels. An increase in Iran’s oil supply to the global market in the short term would not only decrease high prices resulting from the war in Ukraine, but in the long term will increase oil market stability.

In addition to oil, Iran has massive reserves of natural gas that will also enter the global energy market. Iran’s natural gas reserves are estimated to be 32 trillion cubic meters, or 17 percent of the world total, making it the second-largest reserve country globally after Russia. Tehran had already produced approximately 2.4 trillion cubic meters of natural gas in 2019, making it the third-largest producer in the world, and most of its fields have not reached their maximum capacity. According to the managing director of the National Iranian Oil Company, Iran plans to increase its production to 240 million cubic meters per day by investing $11 billion in the natural gas sector. The short-term ramification of these plans is a decreased Turkish reliance on Russia’s natural gas; in the long term, Iran’s natural gas could reach southern European countries and lead to more energy security for the continent.

Location, Location, Location

Iran’s unique geographic location brings added benefits to its natural gas sector. Because it lies between the gas-rich Central Asian countries and the West, Iran could develop its infrastructure development to become a transit country for Central Asian energy. In addition to natural gas, Central Asia has tremendous reserves of other natural resources that have not been fully exploited since the collapse of the Soviet Union. Because of Iran’s isolation on the world stage, Russia has been able to prevent energy linkage between Central Asia and Europe, making its own oil and gas reserves comparatively stronger. However, that could change after the nuclear deal comes into effect. In 2021, former Foreign Minister Mohammad Javad Zarif made a five-day tour to five Central Asian countries, reiterating “his country’s relevance as [a] key transit and trade outlet for the region.”

Iran is already connected with Turkmenistan through a 200-kilometer natural gas pipeline that could gain more importance when extended to Turkey and then to Europe. In fact, Iran is adding to the capacity of the pipeline this year and, at the same time, aims to finalize a larger gas deal with Turkmenistan. In addition, Tehran’s foreign policy objectives are driven by the desire to be a transit hub for the energy resources of other countries. Tehran, for instance, maintains good relations with Kazakhstan for potential energy connectivity plans. It also maintains good relations with Uzbekistan, another landlocked country. Uzbek officials have expressed an interest in using Iran’s Chabahar port to expand to new markets outside the region – a notion discussed in the Trilateral Working Group held by Iran, India, and Uzbekistan.

The nuclear deal could also have ramifications for the stability of the Gulf by decreasing price fluctuations and facilitating smoother shipping in the Persian Gulf. Consequently, the deal could tamper Iran’s aggressive conduct in the region, which has not only targeted other major countries in the region, but international shipping as well. For example, Iran was involved in drone attacks on Saudi oil facilities, both through the Houthi rebels in Yemen and through its proxies in Iraq in 2019. The attack led to the disruption of oil production and increased the price of oil. A few months prior to the attack, Saudi pumping stations were also targeted by armed drones, days after oil tankers were sabotaged near the UAE as the United States braced for imminent threats from Iran’s militias in Iraq. These attacks are in addition to continuous Iranian hijacking of shipping in the vicinity of its waters – for instance, when Iranian forces seized a Panama-flagged tanker and towed it to Iran.

Iran’s Revolutionary Guards also seized a Vietnamese-flagged oil tanker in the Gulf of Oman as tension escalated between the United States and Iran. Iranian forces were judged to have conducted a deadly attack on “a Liberian-flagged, Japanese-owned petroleum product tanker managed by Israeli-owned Zodiac Maritime,” killing a Briton and a Romanian. If the nuclear deal leads to a broader political rapprochement between Iran, on the one hand, and the United States and its partners on the other, it would have a positive impact on Iran’s policy in the region and by extension the energy global market.

Although the benefits of the deal will not be realized immediately after the ink is dry, Iran’s emerging energy role will translate into more influence adding an economic dimension to its regional reach. It will also have an impact on energy-producing countries, as Iran’s share of oil production will increase, oil and gas prices will decrease, and the necessity of further negotiations within OPEC will become more urgent. In other words, reviving the nuclear deal has the potential to reduce political and military tensions and transforming them into a more benign economic competition. After all, many countries within the Gulf region and the broader Middle East will continue to depend on oil production in the near future and all would benefit from more stable relationships.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.